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(This June 16 story has been refiled to fix typo in Procter in first paragraph)
By Astrid Wendlandt
PARIS (Reuters) - Coty (COTY.N) is on track to acquire Procter & Gamble's (PG.N) beauty business in a $12 billion deal that would make the U.S. cosmetic company the world leader in perfume and hair care, sources close to the matter said.
If the deal goes though, Coty would get its hands on brands such as Gucci and Hugo Boss perfume, Wella and Clairol hair care products and Max Factor and Cover Girl make-up, part of its strategy to reverse its own declining sales trends.
For P&G, the sale is part of a large plan to narrow its focus on fewer, faster-growing brands. The world's No. 1 household products maker said in August it could sell about half of its slow-growing brands over the next two years.
Coty was vying with Henkel (HNKG_p.DE) for P&G's hair care businesses and won an auction over the weekend, the sources said, adding that details of the complex transaction are likely to take at least two weeks to be finalised.
For tax purposes, the deal would be completed through a "Reverse Morris Trust", which means that P&G would spin off its beauty assets into a separate company that would then absorb Coty in an all-share deal, the sources said.
Luxembourg-based JAB Holdings, the billionaire Reimann family's investment firm which controls 75 percent of Coty, would own about a third of the equity in the combined business and about 47-48 percent of voting rights, the sources said.
P&G, Coty and JAB Holdings declined to comment.
In New York trade, Coty shares closed 19.3 percent higher and have gained about 50 percent this year. P&G shares rose 1.3 percent.
Wells Fargo analyst Chris Ferrara said a deal would be "transformational" for Coty and estimated it would increase its revenue to nearly $11 billion from $4.4 billion.
"A large deal would likely give Coty the opportunity to quickly exit 'tail' (poorly performing) brands and sustainably raise the company's growth profile," Ferrara said.
In response to lower sales, Coty has been cutting costs and shedding staff. It has also been through much organizational change, merging divisions and replacing chief executives three times in the past three years.
Elio Sceti, who ran Europe's largest frozen foods company Iglo Foods Holdings and has no experience in the cosmetics industry, will become Coty's chief executive next month.
Coty, which makes Marc Jacobs, Calvin Klein, Chloe as well as celebrity perfumes, would become the world's No.1 perfume maker ahead of L'Oreal (OREP.PA) if the deal goes through, according to market research firm Euromonitor International.
This would also mark its entry into the hair care market with the Wella and Clairol brands. In make-up, Coty, which has a significant presence in Britain and France, would gain a much bigger stronghold in the United States.
JAB controls fashion brands Bally and Belstaff, shoe maker Jimmy Choo (CHOO.L) and coffee company D.E Master Blenders 1753, which is set to merge with the coffee business of Mondelez International (MDLZ.O). JAB's assets under management reached $39 billion this year, up from $14 billion in December 2011.
Editing by David Clarke