By Neil J Kanatt, Abigail Summerville and Andres Gonzalez
May 21 (Reuters) - U.S. cosmetics giant Estee Lauder and Spain's Puig said on Thursday they have terminated talks related to a business combination, which would have created a large premium beauty player to better compete with sector leader L'Oreal.
Shares of Estee Lauder rose by about 10% in extended trading on Thursday.
The merger talks, disclosed in March, aimed at forming a $40 billion luxury beauty group, bringing brands such as Tom Ford,
Carolina Herrera, Rabanne, Jean Paul Gaultier and Clinique under one roof.
The merger discussions began few months after France's L'Oreal agreed to a $4.7 billion deal to buy the beauty arm of Gucci-owner Kering, as brands seek growth amid moderating demand after several years of post-pandemic demand.
Sources familiar with the matter said Charlotte Tilbury, the founder of her namesake brand, complicated the deal talks with demands that became too complex and financially didn't make sense. Puig bought a majority stake in Charlotte Tilbury in 2020.
Charlotte Tilbury did not immediately respond to a request for comment.
Estee said the company is focused on continuing to execute its Beauty Reimagined strategy, the turnaround plan under CEO Stephane de La Faverie, aiming to staunch three years of annual sales declines and a contracting market share.
The sources said Estee's recent positive earnings quarter also gave the company confidence to remain independent and keep executing its own plan.
The plan included increased store investment and closing underperforming cosmetics outlets such as M.A.C and Origins.
"We have one of the most powerful portfolios of prestige beauty brands in the world... and we believe we are uniquely positioned to drive sustainable long-term growth globally," he said in a statement.
The company's portfolio includes Bobbi Brown cosmetics, La Mer skincare products, and fragrance brands Le Labo, Jo Malone and Kilian Paris.
RBC Capital Markets analyst Nik Modi said, "We are relieved to hear that the talks... have been terminated," adding that the integration risk of a potential combination would have weighed on the stock for an extended period of time.
The company earlier this month raised its annual profit forecast and said it would cut up to 3,000 more jobs globally as it accelerates a broader restructuring, while Puig reported slower sales growth for the first quarter in late April.
Estee, which has a long history of growing through acquisitions, including its $2.8 billion deal for U.S. fashion label Tom Ford in 2022, said it continues to evaluate potential acquisitions and divestitures.
(Reporting by Neil J Kanatt in Bengaluru, Abigail Summerville in New York and Andres Gonzalez in London; Editing by Shailesh Kuber)
