09:16 AM EDT, 03/24/2026 (MT Newswires) -- Estee Lauder's ( EL ) potential merger with Spanish beauty and fashion group Puig makes strategic sense, as it could allow the cosmetics company to fill the fragrance gap in its portfolio, according to RBC Capital Markets.

Estee Lauder ( EL ) said late Monday that it's in discussions with Puig to possibly combine their businesses, but said no decision has been made and there is no assurance an agreement will be reached.

The potential deal would create a $40 billion luxury beauty company, Reuters reported.

About 70% of Puig's sales are in fragrances and a potential combination will enable Estee Lauder ( EL ) to fill the "big gap" it has in its portfolio with fragrances, compared with rivals such as L'Oreal and LVMH, RBC said in a client note emailed Tuesday. The brokerage believes the financial profiles of the two companies are "very similar," with gross margins in the mid-70% range.

Estee Lauder's ( EL ) shares edged down 0.1% in the most recent premarket activity, following a 7.7% decline at Monday's close. The stock has lost 24% so far this year.

"We note that this is not an out-of-the-blue idea," RBC's co-head of global consumer and retail research, Nik Modi, said in the note. "Estee Lauder ( EL ) has looked at Puig in the past."

Additionally, RBC believes Puig will help further diversify Estee Lauder's ( EL ) geographic exposure away from China and provide more scale in Latin America and Europe.

Last month, Estee Lauder ( EL ) lifted its full-year earnings outlook after recording higher fiscal second-quarter results year over year. At the time, the company said it continues to project tariffs to weigh on profitability by roughly $100 million in the ongoing fiscal year.

RBC has an outperform rating on the cosmetic company's stock with a price target of $113.