The deal flow for mergers and acquisitions this year in the beauty sector will be the same as the last two years, but 2014 could see more activity as strategic buyers are likely to become more acquisitive.
This story first appeared in the May 10, 2013 issue of WWD. Subscribe Today.
That’s the prediction of Steve Davis, managing director at Intrepid Investment Bankers LLC. Davis spearheaded the firm’s recently published Beauty Care M&A Report. He also has served as a senior advisor on several deals in the beauty space: PureOlogy Research to L’Oréal SA; Alterna to TSG Consumer Partners and Markham Prestige Group; Joico Laboratories to Zotos International, a subsidiary of Shiseido, and the recapitalization of Salon Grafix with CID Capital and management.
“My expectation is that 2013 will be a good, but not a great, year for beauty care M&A — likely similar to 2011 and 2012 levels. All the fundamentals are in place for a breakout year. I just think [it] more likely will be 2014 as certain strategic buyers are still focused on internal issues and certain sellers remain on the sidelines waiting for a premium strategic deal to emerge,” Davis said.
Intrepid’s Beauty Care M&A Report noted that “2012 will perhaps be better remembered for the deals that did not happen than for completed transactions.”
The report noted several brands — such as Tarte Cosmetics, Yes To and StriVectin — that were supposedly in play, but transactions failed to materialize.
The investment banking firm tracked 92 transactions in 2012, down 4 percent from 2011. The median deal size last year fell to $31 million from $50 million in 2011. Reasons for the slowdown and decline in transaction size were due in part to acquirers remaining cautious because of what was a weak consumer backdrop, as well as strategics focusing more on add-ins to fill white space in their portfolios.
Statistics from the last two years aside, Davis doesn’t foresee any major slowdown this year: “Beauty care has proven to be relatively recession resistant and has typically maintained its relative share of the consumer’s wallet.”
Beauty M&A deals in the pipeline this year will be weighted towards the second half as the “expiration of the Bush-era tax cuts in December pulled some deal volume from Q1 2013 into Q4 2012,” the investment banker explained.
Davis said the industry should expect to see a mix of strategic and private equity buyers. “Strategic buyers will continue to be picky, but ultimately aggressive in spots where they can gain access to rapidly growing categories, geographies or channels that are additive to their brand portfolios. We see private equity groups aggressive for good beauty care companies across all categories and channels. Beauty care remains an extremely attractive category for private equity groups as a whole, and we do not see that equation changing in 2013.”
There’s one other trend the investment bank believes will continue this year and beyond: new names from the private equity world that could become more active in the beauty space. Intrepid’s Beauty Care M&A Report noted Star Avenue Capital’s investment in Macadamia Natural Oil and Tengram Capital Partners’ investments in Laura Geller Beauty and Nest fragrances. The report also cited financial sponsors that were adding to existing portfolios, such as North Castle Partners, TPR Holdings and Brynwood Partners.