*

Sale includes Creed and long-term fragrance licences for

Bottega

Veneta, Balenciaga

*

Sale marks Kering CEO Luca de Meo's first major move to

cut debt

and refocus on core fashion business

*

Sale marks L'Oreal's biggest deal to date, surpassing

2023's

$2.5 billion Aesop acquisition

(Adds analyst comment in paragraphs 6-8; detail on closing of

sale)

By Tassilo Hummel and Dominique Patton

PARIS, Oct 19 (Reuters) - Gucci owner Kering

said on Sunday it has agreed to sell its beauty business to

L'Oreal for 4 billion euros ($4.66 billion), in a

major shift in strategy by new CEO Luca de Meo as he moves to

tackle the luxury group's high debt and refocus on its core

fashion business.

Under the deal, French beauty giant L'Oreal will acquire

Kering's fragrance line Creed, as well as rights to develop

fragrance and beauty products under Kering's fashion labels

Gucci, Bottega Veneta and Balenciaga under a 50-year exclusive

license.

The licence for Gucci fragrances is currently held by Coty ( COTY )

and the new 50-year deal with L'Oreal will commence

when that expires, believed by analysts to be in 2028.

The sale is a significant step towards reducing Kering's net

debt, which stood at 9.5 billion euros at the end of June, on

top of 6 billion euros in long-term lease liabilities, sparking

investor concern.

It is also a major shift in direction by De Meo less than

two months after taking the helm, as he unwinds one of the

biggest strategic pivots made by his predecessor Francois-Henri

Pinault, whose family controls the group, in recent years.

Kering set up its beauty business in 2023 after acquiring

perfume maker Creed for 3.5 billion euros in an effort to

diversify and reduce its reliance on its Gucci brand, which

accounts for most of its profits. But the group has struggled to

ramp up the business, posting a 60 million euro operating loss

for the first half of the year.

The company is also battling declining growth at its largest

brand Gucci, which was hit hard by slowing demand in the key

Chinese market. Gucci's revenue plummeted 25% year-on-year in

the last reported quarter, increasing the pressure on Kering to

deleverage to avoid further credit downgrades.

"We believe selling Kering Beauté at around the same price

paid for Creed two years ago is bitter but necessary medicine,"

said analysts at Bernstein.

A move back to beauty licensing would be "less capital

intensive, less operationally geared, and arguably higher

margin", said analysts at RBC, ahead of the deal, even if it has

to share revenues with L'Oreal.

"We also believe it indicates a strategic re-focus towards

its core competencies in soft luxury and any beauty divestment

may free up investment headroom towards these priorities, " they

wrote in a note to investors.

De Meo, who took over as CEO in September, had told

shareholders he planned to take some difficult decisions to

reduce debt at the group, including rationalising and

reorganising where necessary.

The company has also postponed a plan to fully acquire

Italian fashion brand Valentino, and is aiming to sell stakes in

its real estate to raise cash.

L'Oreal, the world's biggest dedicated cosmetics and beauty

player, already produces blockbuster perfumes under the Yves

Saint Laurent label after acquiring rights to the brand from

Kering for 1.15 billion euros in 2008. The two companies also

said they were setting up a joint venture to provide experiences

and services for luxury clients.

The deal for Kering beauty will be L'Oreal's largest to

date, bigger than its purchase of Australian brand Aesop for

$2.5 billion in 2023. It is expected to close in the first half

of 2026.

"L'Oreal enjoys strong momentum in the Luxe division and

they must be looking forward to getting hold of the perfume and

beauty licences associated with Kering's prestigious yet

relatively underdeveloped brands," said Bruno-Roland Bernard, a

consultant and adjunct professor for corporate finance and

luxury management at Paris-based Institut Francais de la Mode.

"It's also possible they are taking advantage of a

favourable bargaining position - with limited competition: who

has the credentials and the firepower to deal with a Kering

under time pressure?"

L'Oreal, which has said there were "plenty" of acquisitions

being looked at this year, has also been approached by

representatives of Armani Group, Reuters reported this month,

after the beauty conglomerate was named in the will of late

designer Giorgio Armani as one of the preferred buyers for a

minority stake in his fashion house.

($1 = 0.8576 euros)

(Reporting by Dominique Patton and Tassilo Hummel in Paris,

Anusha Shah in Bengaluru; Editing by Edmund Klamann, Diane Craft

and Lincoln Feast.)