(Reuters) -Gucci-owner Kering has agreed to sell its beauty business to L'Oreal for 4 billion euros ($4.7 billion) in a strategic shift by new CEO Luca de Meo, who is trying to cut the luxury group's debt and refocus on its fashion business.

WHAT IS THIS SALE ABOUT?

The sale, which includes fragrance line Creed and long-term fragrance licences for Bottega Veneta, Balenciaga and Gucci, is a big step in cutting Kering's debt, a key investor concern.

"The proceeds will strengthen the balance sheet and support deleveraging, adding to the 1 billion euro reduction in net debt already achieved in the first half of 2025," Juliane Barthold and Stoyan Toshev from Frankfurt-based brokerage Metzler told Reuters in an email.

Royalties from these brand licenses will ensure a continuing income stream from the beauty segment for Kering, they added.

Kering's net debt was 9.5 billion euros at the end of June. It also had 6 billion euros of long-term lease liabilities. Kering did not give any detail on the deal's impact on its debt.

L'Oreal and Kering agreed to set up a 50/50 joint venture to explore further business opportunities beyond cosmetics.

KERING STRATEGIC U-TURN

Kering set up its beauty business in 2023 after buying Creed for 3.5 billion euros in an effort to diversify and reduce its reliance on the Gucci brand, which makes up most of its profit. 

But it has struggled to ramp up the business, posting a 60 million euro operating loss for the first half of 2025.

Kering is also battling declining growth at Gucci, which has been hit by slowing demand in the key Chinese market. Gucci made up 44.5% of its revenue and 63% of its operating income in 2024.

Sarah Thirion, an analyst at Paris-based Midcap, said in a note to investors that Kering was "demonstrating strategic realism", adding: "(It) must choose its battles, and beauty is clearly no longer one of them".

DE MEO FIRMLY IN THE DRIVING SEAT

The sale marks a shift by CEO De Meo, backtracking on one of the big strategic pivots of recent years by his predecessor Francois-Henri Pinault, whose family controls Kering.

De Meo, who took over as CEO in September, told shareholders he planned to take some difficult decisions to cut Kering's debt, including rationalising and reorganising where necessary.

Kering has also postponed a plan to fully acquire Italian fashion brand Valentino, and aims to sell stakes in its real estate to raise cash.

"This highlights that Luca de Meo has the mandate to make big changes and is acting quickly to make things happen," Deutsche Bank analysts wrote in a research note.

WHAT'S NEXT FROM DE MEO?

"Luca de Meo has already laid the foundations for his ascendancy. He will certainly not fail to act quickly on the excessively high operating costs, which, together with the decline in sales, have contributed to the decline," Midcap's Thirion told Reuters in an email.

Meanwhile, the joint venture will mean Kering benefits from L'Oreal's beauty expertise, Barthold and Toshev said.

"We are awaiting more details from the strategy in spring 2026, which we expect to boost the operating performance further," they added.

Kering is set to publish its third-quarter results on Wednesday, after the market close in Paris.

($1 = 0.8575 euros)