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Sep 23, 2016

S3 BLACKLIGHT: Shorts Jumping Into Both Sides of P&G – Coty Spinoff

Proctor & Gamble Co (PG US) short interest increased by $5.1 billion, or 205%, since the end of August to $7.5 billion after the firm announced it will be merging 43 of its beauty brands with Coty Inc. (COTY US). Short sellers did not ignore Coty as its short interest increased $99 million, or 22%, to $555 million.

P&G will be using a Reverse Morris Trust Transaction as was used in the Lockhead Martin (LMT US) – Leidos Holdings (LDOS US) transaction in August. The deal will be worth $12.5 - $15 billion (depending on the two parties share prices on its completions date of 10/31/16) and will save P&G $2 -$4 billion in taxes.

P&G will first transfer its Specialty Beauty Brands portfolio of companies to a newly formed holding company called Galleria Company. Shareholders that tender their shares will receive $1.075 worth of Galleria shares for each $1.00 of P&G shares they own, a 7% discount. Once the share exchange is completed Galleria shares will merge into Coty Inc. at a 1 for 1 share ratio. There will only be 409.7 million Galleria issued in this transaction or 4.15% of P&G’s float.

After the transaction is completed P&G shareholders will own 55% of Coty A, Coty class B shareholder JAB Cosmetics and Coty class A shareholders will own the remaining 45% and Coty’s market cap will increase from $8 billion to approximately $19 billion.

Short sellers have been active in both names since the end of August. Coty short interest is up $85 million, or 19% in September while Proctor & Gamble short interest is up $13.9 billion, or 561% in September. P&G short interest averaged $1.9 billion in 2016 prior to the deal announcement, $1.6 billion in 2015 and $2.0 billion in 2014. The dramatic increase in P&G short interest is due to the merger arbitrage opportunities in the Coty deal.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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