Shares in Kering, the French luxury group that owns Gucci and other brands, jumped sharply on Monday after it announced a 4 billion euros ($4.66 billion) sale of its beauty products division to L'Oreal a day earlier.
Its shares soared more than 5% at the opening of Paris trading, following its announcement Sunday of the deal that would also give L'Oreal 50-year licences to develop and distribute products under Kering's Gucci, Bottega Veneta and Balenciaga labels.
The licence for Gucci fragrances is currently held by Coty and the new 50-year deal with L'Oreal will commence when that expires, believed by analysts to be in 2028.
The sale is a significant step towards reducing Kering's large debt pile, on top of 6 billion euros in long-term lease liabilities, sparking investor concern.
L'Oreal's shares rose a modest 0.6%, in line with the 0.5% increase for the Paris CAC 40 index.
Kering has been struggling financially for several years, and in July said its first-half profits had slipped by nearly half on a 16% drop in turnover.
Proceeds of the sale of its beauty division, which includes its leading perfume brand Creed, will go to alleviate the 9.5 billion euros in debts it has racked up. Kering is to publish its third-quarter results on Wednesday.
Kering set up its beauty business in 2023 after acquiring perfume maker Creed for 3.5 billion euros in an effort to diversify and reduce its reliance on its Gucci brand, which accounts for most of its profits. But the group has struggled to ramp up the business, posting a 60 million euro operating loss for the first half of the year.
The company is also battling declining growth at its largest brand, Gucci, which was hit hard by slowing demand in the key Chinese market. Gucci's revenue plummeted 25% year-on-year in the last reported quarter, increasing the pressure on Kering to deleverage to avoid further credit downgrades.
"We believe selling Kering Beauté at around the same price paid for Creed two years ago is bitter but necessary medicine," said analysts at Bernstein.
Kering's new CEO, Luca de Meo, who took the helm just a month ago and is trying to turn around the company's fortunes, has called the deal "a decisive step" for the French group.
De Meo had told shareholders he planned to take some difficult decisions to reduce debt at the group, including rationalizing and reorganizing where necessary.
The company has also postponed a plan to fully acquire Italian fashion brand Valentino, and is aiming to sell stakes in its real estate to raise cash.
L'Oreal, the world's biggest dedicated cosmetics and beauty player, already produces blockbuster perfumes under the Yves Saint Laurent (YSL) label after acquiring rights to the brand from Kering for 1.15 billion euros in 2008. The two companies also said they were setting up a joint venture to provide experiences and services for luxury clients.
The deal for Kering beauty will be L'Oreal's largest to date, bigger than its purchase of Australian brand Aesop for $2.5 billion in 2023. It is expected to close in the first half of 2026.
"L'Oreal enjoys strong momentum in the Luxe division and they must be looking forward to getting hold of the perfume and beauty licences associated with Kering's prestigious yet relatively underdeveloped brands," said Bruno-Roland Bernard, a consultant and adjunct professor for corporate finance and luxury management at Paris-based Institut Francais de la Mode.
"It's also possible they are taking advantage of a favorable bargaining position – with limited competition: who has the credentials and the firepower to deal with a Kering under time pressure?"
L'Oreal, which has said there were "plenty" of acquisitions being looked at this year, has also been approached by representatives of Armani Group, Reuters reported this month, after the beauty conglomerate was named in the will of late designer Giorgio Armani as one of the preferred buyers for a minority stake in his fashion house.