NEW YORK CITY, New York: Estee Lauder is in discussions with Spanish beauty group Puig over a potential merger that could reshape the global fragrance industry and create a luxury beauty giant valued at about US$40 billion.

The companies confirmed that talks are underway regarding a possible business combination that would bring major brands such as Tom Ford, Carolina Herrera, Rabanne, and Clinique under one umbrella.

The proposed deal would strengthen both companies' positions in the fragrance segment, which has been a key growth driver but is now facing a slowdown after several years of strong post-pandemic demand.

The talks come amid a broader wave of consolidation in the beauty sector. Earlier this year, Kering agreed to sell its beauty business to L'Oreal for $4.7 billion, giving L'Oreal control of the Creed fragrance line and exclusive rights to develop products for several luxury fashion brands, further expanding its portfolio that includes YSL, Armani, Prada, and Valentino.

A merger between Estee Lauder and Puig would help the combined entity compete more effectively with L'Oreal, a source familiar with the discussions said.

Investor reaction was mixed. Shares of Estee Lauder, which has a market value of about $31 billion, fell more than seven percent following the announcement. The company's portfolio includes Bobbi Brown cosmetics, La Mer skincare, and fragrance brands such as Le Labo, Jo Malone, and Kilian Paris.

Puig, based in Barcelona, owns fragrance lines from Jean Paul Gaultier and Byredo, as well as cosmetics brand Charlotte Tilbury, and has a market value exceeding $10 billion.

The deal could also support Estee Lauder's turnaround efforts as it faces weak consumer demand in the United States. The company recently issued an annual outlook that missed expectations, with softness in the Americas offsetting improvements in China and Europe.

"A potential merger between Estée Lauder and Puig could shake up the beauty industry, but it could equally saddle Estée Lauder with more problems," said eMarketer analyst Rachel Wolff.

"A deal of this ‌magnitude could ⁠complicate Estée Lauder's ability to innovate and keep pace with more nimble competitors."

Puig has also reported slowing growth in fragrances as sales normalize after the pandemic-era surge, which could weigh on future growth prospects, Wolff added.

The companies are reportedly considering a combination involving both cash and stock, according to a Wall Street Journal report. However, no agreement has been reached, and there is no certainty that the talks will lead to a deal.

Fragrance remains a key focus area. The segment, Estee Lauder's third-largest by revenue, grew nine percent in its latest quarterly results, supported by demand from younger consumers.

Estee Lauder has historically expanded through acquisitions, including its $2.8 billion purchase of Tom Ford in 2022, and has identified fragrance as a central pillar of its strategy.

"From a strategic standpoint, this deal makes sense. Estee Lauder has a big ⁠gap in its portfolio with fragrances relative to the likes of L'Oreal and LVMH, and this combination would fill that gap," said RBC Capital Markets analyst Nik Modi.

Puig derives more than 70 percent of its revenue from fragrances and reported a 12 percent rise in net profit for 2025, following its 2024 stock market debut.

While the outcome of the talks remains uncertain, the potential deal underscores the growing importance of scale and brand strength in the global beauty industry.