Gucci owner Kering has agreed to sell its beauty business to L'Oreal for four billion euros ($A7.2 billion) in a major shift in strategy as new chief executive Luca de Meo moves to tackle the group's high debt and refocus on its core fashion business.
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Under the deal, French beauty giant L'Oreal will acquire Kering's fragrance line Creed, as well as rights to develop fragrance and beauty products under Kering's fashion labels Gucci, Bottega Veneta and Balenciaga under a 50-year exclusive licence.
The licence for Gucci fragrances is currently held by Coty and the new 50-year deal with L'Oreal will commence when that expires, believed by analysts to be in 2028.
The sale is a significant step towards reducing Kering's net debt, which stood at 9.5 billion euros ($A17.1 billion) at the end of June, on top of six billion euros ($A11 billion) in long-term lease liabilities, sparking investor concern.
It is also a major shift in direction by De Meo less than two months after taking the helm, as he unwinds one of the biggest strategic pivots made by his predecessor Francois-Henri Pinault, whose family controls the group, in recent years.
Kering set up its beauty business in 2023 after acquiring perfume maker Creed for 3.5 billion euros ($A6.3 billion) 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 ($A108 million) operating loss for the first half of the year.
The company is also battling declining growth at its largest brand Gucci, which was hit hard by slowing demand in the key Chinese market.
Gucci's revenue plummeted 25 per cent year-on-year in the last reported quarter, increasing the pressure on Kering to deleverage to avoid further credit downgrades.
"We believe selling Kering Beauté at around the same price paid for Creed two years ago is bitter but necessary medicine," said analysts at Bernstein.
De Meo, who took over as chief executive in September, had told shareholders he planned to take some difficult decisions to reduce debt at the group, including rationalising and reorganising where necessary.
The company has also postponed a plan to fully acquire Italian fashion brand Valentino, and is aiming to sell stakes in its real estate to raise cash.
L'Oreal, the world's biggest dedicated cosmetics and beauty player, already produces blockbuster perfumes under the Yves Saint Laurent label after acquiring rights to the brand from Kering for 1.15 billion euros ($A2.06 billion) 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 $US2.5 billion ($A3.8 billion) in 2023. It is expected to close in the first half of 2026.
Australian Associated Press
