International Flavors & Fragrances: Lucas Meyer Cosmetics Business Will Be Sold to Clariant

International Flavors & Fragrances IFF announced the divestiture of the Lucas Meyer cosmetics ingredients business to Clariant for $810 million in cash proceeds. Having updated our model to include the deal, we maintain our $130 per share fair value estimate for IFF. Our wide moat rating is also unchanged.

IFF shares were down slightly on the day as the market reacted negatively to the divestiture price, which was well below the $1 billion goal that IFF was seeking for the Lucas Meyer business, as reported by Bloomberg when the business was initially rumored for sale in May.

Regardless, at current prices, we view IFF shares as materially undervalued with the stock trading at a little more than half our fair value estimate. Shares also trade below our downside scenario valuation, which produces a fair value estimate of $80 per share. In our downside scenario, we assume IFF’s revenue sees little rebound after a decline in 2023, with long-term profit margins well below historical levels. Accordingly, we see a strong margin of safety at the current share price, with a lot of bad news already priced into the stock.

Management signaled its plan to divest the Lucas Meyer business, which IFF acquired in 2015, as a way to accelerate debt repayment. IFF’s debt levels remain elevated following the Frutarom acquisition in 2018 and the DuPont nutrition and biosciences business in 2021. The divestiture should help to repay the majority of IFF’s nearly $1.2 billion of debt due in 2024. To restore its balance sheet to a net debt/EBITDA ratio below 3 times, we think IFF will need to make additional divestitures or cut its dividend as a way to accelerate debt repayment. While management is exploring additional divestitures, we will not include any further deals in our valuation until one is announced.