Estée Lauder has walked away from merger talks with Spanish perfume maker Puig, leaving the beauty giant with more flexibility to pursue smaller acquisitions as it focuses on its turnaround plan.

The deal would have created a $40bn premium beauty powerhouse, bringing Estée Lauder brands including Clinique, MAC and Tom Ford together with Puig’s portfolio, which includes Carolina Herrera and Charlotte Tilbury. It would also have created a stronger rival to L’Oréal.

However, analysts said the move was a prudent one for Estée Lauder, with investors concerned that a Puig deal could distract management from its ongoing restructuring and add pressure to a balance sheet where net debt is running at around five times EBITDA.

Shares in Estée Lauder jumped 10 per cent on Friday after the talks collapsed, with investors appearing to welcome the company’s decision to avoid a complex transaction.

Reuters reported that investor opposition was one factor behind the breakdown, while disagreements between the controlling families and demands linked to Charlotte Tilbury also complicated the talks.

Estée Lauder, which owns Clinique, MAC and Jo Malone, has previously said acquisitions could help reshape its portfolio by filling gaps across geographies, categories and price points.

However, chief executive Stéphane de La Faverie has stressed that the priority under the company’s Beauty Reimagined restructuring plan is to rebuild organic growth first, with any deal needing to fit tightly with the revamped business.

In a statement confirming the end of the Puig talks, de La Faverie said Estée Lauder remained confident in its standalone strategy and would continue to evaluate acquisitions and divestitures where they support long-term growth.

Morningstar analyst Erin Lash said Estée Lauder could now look to “smaller, niche operators” to strengthen its category or geographic position.

“While the deal stood to strengthen Estée’s position in fragrance, we were sceptical, given the potential deal’s size and the distraction it could pose for management amid its ongoing turnaround,” she said.

Jefferies analyst Sydney Wagner said calling off the talks had removed a complex transaction that would have offered “only modest strategic benefit and limited portfolio diversification”.

“With the transaction no longer under consideration, we see the most compelling use of capital in assets positioned down the price ladder,” she said, pointing to mass and “masstige” brands in colour cosmetics and skincare.

Estée Lauder has already pushed ahead with more targeted deals. It fully acquired Indian prestige beauty brand Forest Essentials earlier this week, having first taken a minority stake in 2008 and increased its holding to 49 per cent in 2020.

The conclusion of the takeover talks follows Estée Lauder’s recent minority stake in London-based luxury skincare brand 111SKIN and its investment in Mexican fragrance brand Xinu last November.

Nadine Graf, Estée Lauder’s president of EMEA, UK, Ireland and emerging markets, said Forest Essentials had almost doubled the company’s market share in India and was helping it reach consumers it may not otherwise have recruited.

She added that Europe and the UK remained tougher markets, as high-end beauty was already widely available and offered less room for expansion.

The company is also pressing ahead with cost cuts under Beauty Reimagined. Earlier this month, Estée Lauder said it would cut up to 3,000 more jobs globally, taking expected total job losses to as many as 10,000, as it targets up to $1.2bn in annual cost savings.