* Puig warns Middle East war is hurting demand, expects

impact to continue next quarter

* Estée Lauder faces high debt, restructuring, and

investor doubts over merger benefits

* Combined Estée-Puig would still trail L'Oréal in sales,

but could boost margins and competitiveness

By Arriana McLymore

NEW YORK, April 29 (Reuters) - Estée Lauder

investors hoping for stellar results from the company's buyout

target 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. 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 DISCIPLINE

L'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

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. Still, it delivered its fastest quarterly sales

growth in two years and struck an upbeat tone on demand.

Estée has struggled to keep pace, weighed down by weak sales

in China, reliance on travel retail and uneven demand for

makeup. Even combined, Estée and Puig would post about $20.6

billion in sales, far short of L'Oréal's total annual revenue of

$51.6 billion.

Still, a $40 billion merger would give Estée a fighting

chance, lifting Estée's margins to an estimated 15.6%, from

about 13.8% currently.

"They need to preserve what makes each company great," said

TD Cowen analyst Oliver Chen, pointing to Estée's brand

portfolio and Puig's strength in luxury fashion and fragrance.