LONDON/PARIS (Reuters) -Ageing brands and declining sales could make Coty's ( COTY ) makeup business a hard sell, raising the prospect of piecemeal deals or lower than expected proceeds that might complicate the group's plans to cut debt and invest in growth.

Coty ( COTY ) said on Tuesday it had launched a review of its mass-market Consumer Beauty business, a prelude to a possible sale or spinoff of some brands in a bid to cut debt, reverse shrinking cash flow, and focus on more profitable fragrances. 

The business, home to the CoverGirl and Rimmel brands, generates around $1.2 billion in annual revenues, but has been losing market share to competitors with faster innovation cycles and more accessible price points.

WHO COULD BUY COTY'S CONSUMER BEAUTY BRANDS?

"It's hard for these brands because they don't look new to today's consumers. And newness is important, especially in colour cosmetics," said Morningstar analyst Dan Su.

Barclays analysts described the division as a "tough asset to sell". They said it could be worth anywhere between $690 million and $950 million.

Buyers this year have shown strong interest in smaller, fast-growing brands like Hailey Bieber's makeup and skincare line Rhode, snapped up by retailer Elf Beauty for $1 billion, and the vitamin A-based skincare business Medik8 bought by L'Oreal for an estimated $1 billion.

Buyout firms could look at the division, much as private equity house KKR bought a majority stake in Coty's ( COTY ) professional and retail haircare business, Wella, in 2020. 

"I expect piecemeal deals rather than a one-shot sale," Michael Ashley Schulman, partner and CIO at Running Point Capital Advisors, naming private equity firms Permira and L Catterton among possible suitors.

Coty ( COTY ) said it did not comment on speculation. L Catterton declined to comment. Permira did not immediately respond to a request for comment.

Coty's ( COTY ) Consumer Beauty business reported an 8% drop in sales in the year ended June 30. Morningstar analysts expect another high-single-digit percentage decline this financial year, as it struggles to compete with social media influencers launching their own brands and selling on fast-growing online channels.

Coty's ( COTY ) in-house manufacturing has made it slower to innovate when compared to firms like Elf that use third-party producers, resulting in market share that is slipping over time, said Bank of America analyst Anna Lizzul.

"It's a melting iceberg situation," she said.

COTY CAME LATE TO SHIFTING FRAGRANCE TRENDS

Coty ( COTY ) became a beauty industry giant after buying Procter & Gamble's ( PG ) perfume, hair care and makeup businesses for $12.5 billion in 2015. After divesting from hair and now possibly consumer cosmetics, fragrance will be its primary focus.

Its newly combined fragrance division accounts for 69% of Coty's ( COTY ) sales and, with categories growing between 2% and 9%, is performing far better than Coty's ( COTY ) consumer cosmetics. 

But it relies heavily on licences, and about 14% of them are due to expire in the next three-and-a-half years, said BofA.

The blockbuster licence for Gucci fragrances, which analysts believe runs until 2028, brings in about $500 million a year, BofA estimates - almost double Coty's ( COTY ) free cash flow of $277.6 million in its last financial year. 

Selling the makeup business could bring in money for what some analysts think is much-needed investment.

"It would have probably helped to do this strategic review 10 years ago," said Alfonso Emanuele de Leon, a beauty industry veteran and partner at FA Hong Kong Consultancy. "Most importantly, when it was getting clear that the fragrance market was moving towards conceptual, experiential brands."

Top sector player L'Oreal has invested in niche Chinese fragrance brands To Summer and Documents, Estee Lauder ( EL ) in fellow Chinese brand Melt Season, and Spanish rival Puig acquired a majority stake in Sweden's Byredo.

Coty ( COTY ) should have recognised that its fragrance segment was shrinking and made acquisitions too, Emanuele de Leon said.

"They can still do it, it's just going to be more expensive and maybe too late because the wave has already reached the shore."