Middle East war clouds Puig outlook, complicating Estée Lauder deal hopes

About this update from Puig Brands, S.a. Class B

By Arriana McLymoreEstée Lauder NYSE:EL investors hoping for stellar results from the company's buyout target Puig BME:PUIG were disappointed on Tuesday, when the Spanish luxury beauty company flagged its slowest quarterly growth since the throes of the COVID-19 pandemic.While Puig maintained its full-year outlook, it warned that the war in the Middle East was hurting demand, and would likely do so next quarter. That caution matters for Estée, which is hoping Puig’s resilient margins and strong cash flow can help fuel its own turnaround after a prolonged sales slump.Estée is drawn to Puig's buzzy brands including Carolina Herrera and Charlotte Tilbury - popular with TikTok influencers and well-to-do millennials - and sees them as a way to compete better with French heavyweight L’Oréal EURONEXT:OR. Estée is considering a takeover bid for all of Puig's Class B shares at 18 to 19 euros ($21-$22.20) a share, Reuters reported Wednesday.New CEO Jose Manuel Albesa said on Tuesday merger talks were "ongoing."But Puig generates a tenth of its sales from travel retail, leaving it exposed to swings in airport shopping and international travel. And Estée shareholders remain unconvinced the tie‑up would significantly narrow the gap with L’Oréal, particularly as Estée continues restructuring and sales momentum remains fragile.Estée has cut 7,000 jobs and streamlined brands, but its stock is down 1% since news of the merger talks emerged on March 23.Balance‑sheet pressure adds to investor unease. Estée’s net debt stands at nearly five times annual EBITDA, limiting flexibility should this large acquisition fall short of expectations. By contrast, L’Oréal’s net debt is just 20% of EBITDA.Estée reports January-March results on Friday. Analysts polled by LSEG expect a 3.9% rise in sales from a year earlier, when revenue plunged 10%, though growth would slow from the previous quarter.A DEAL WILL TEST EXECUTION, DEBT DISCIPLINEL’Oréal has spent years widening its lead in premium beauty, bolstering a broad portfolio across skincare, makeup and high‑margin fragrance, including acquisitions such as Kering’s EURONEXT:KER perfume assets. Its Luxe division, home to Lancôme, generated $18.3 billion in sales last year and more than a quarter of group profit.Like Puig, L’Oréal has flagged war‑related pressure, particularly in the UAE, and expects a bigger impact in the second quarter....

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