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Beauty companies and financial firms are in a buying mood.
After a lackluster year on the mergers and acquisitions front in 2013, the pace of deals is slowly beginning to pick up this year as more companies are actively scouting brands to add to the fold. But while their interest in deal-making is percolating, potential buyers are showing incredible restraint in waiting for the right assets to emerge.
“Buyers increasingly view M&A as a strategic imperative to fuel growth, but they have been more discerning about what fits their portfolio,” says Kelly McPhilliamy, a managing director at Wells Fargo Securities.
John Hansen, a managing partner at JH Partners, takes a similar view. “The beauty market today is pretty binary: There are some really wonderful, nicely positioned beauty companies. They go right away for a nice price and there’s good market activity,” he says. “Then there’s a bunch of not so nicely positioned firms that either aren’t growing or are not profitable enough and are languishing. That tells me that there are more-discerning buyers who are more sophisticated in terms of their ability to parse through the opportunities out there and identify those with real growth potential.”
A number of brands on the market—NYX Cosmetics and Perricone MD among them—are actively looking for a buyer; even more have recently explored the process, such as Carol’s Daughter, Yes To Inc. and Ahava. Some of the deals that didn’t get done last year are spilling over into this year, creating a nice momentum in the first half of 2014. The market has heated up since January, with L’Oréal acquiring Chinese facial masks–maker Magic Holdings International Ltd., TPG Growth buying a majority stake in E.l.f. Cosmetics from the brand’s founders and TSG Consumer Partners, and Japan’s Kosé Corp. acquiring a 93.5 percent stake in Tarte Cosmetics from founder Maureen Kelly and Encore Consumer Capital.
“The market is strong,” says Marco Habert, a managing director at Deutsche Bank. But he cautions, “We are not seeing a flood of deals due to limited supply. Many of the companies on the market have been there for some time. People are waiting for more attractive deals. But there is a lot of buyer interest.”
Those buyers include the biggest names in beauty. L’Oréal, Coty Inc. and Revlon Inc. have all been active on the M&A front in recent years, and the Estée Lauder Cos. Inc. has acknowledged it’s on the lookout for new opportunities. Of the major beauty firms, only Procter & Gamble Co. has declared that it’s sitting on the sidelines at the moment. “The last thing we need now is an acquisition in beauty. We have plenty of brands in the portfolio and we have plenty of product,” P&G’s chief executive officer A.G. Lafley told Wall Street analysts earlier this year at the Consumer Analyst Group of New York Conference.
While many of P&G’s peers lie in wait for the right brands to buy, they are eyeing several trends shaping the M&A landscape related to brand size, product category and geography.
The smaller size of many assets currently on the market is prompting companies to revisit their strategy, with both financial and strategic buyers looking at brands under the traditional threshold of $50 million in wholesale sales. Although few strategic firms have shown an interest in actually acquiring these brands, they are giving them more thought than in years past and many are now contacting companies earlier in their life cycle.
L’Oréal has already shown a willingness to buy brands at an earlier stage. The beauty giant bought Essie Cosmetics in 2010, when the nail lacquer brand had wholesale sales of around $28 million, and in late 2012, it purchased the men’s grooming brand Baxter of California, when it generated an estimated $3 million in annual sales. Financial observers say Lauder, which hasn’t acquired a brand since its 2010 purchase of Smashbox Cosmetics, has been peeking at some smaller brands, including Butter London, a nail lacquer and cosmetics brand that generates an estimated $20 million in wholesale sales.
Lauder declined to comment on its interest in smaller-size assets, but the company did point to its history of nurturing acquired lines into large, global brands. “Acquisitions have played a strong role in our growth strategy for more than 20 years, beginning with the wildly successful and beloved MAC brand in 1994,” says Peter Jueptner, the company’s senior vice president of strategy and new business development. “[Lauder] has a proven track record of acquiring high-potential, entrepreneurial brands with global opportunity—like La Mer, Bobbi Brown Cosmetics and most recently, Smashbox—and shaping them into market leaders… We are continually monitoring the market for the right opportunities, looking at potential minority investments and acquisitions that present compelling opportunities to strengthen our position by geography, product category or channel.”
For now, many large beauty firms—Lauder included—seem to be in a browsing mode rather than a buying one. In fact, many deals on the market are failing because the targets are simply too small.
“There’s a point at which you’re just not relevant,” says one investment banker. “Brands with wholesale sales of $50 million and north seem to matter.”
Traditionally, brands with wholesale sales under $60 million have largely been the domain of private equity firms, which are eager to build scale and then sell to a strategic buyer or pursue an initial public offering.
Hansen explains that the larger beauty firms are often not set up to manage brands with less than $60 million in revenue. “They require a different level of attention, management and care,” he says.
The changing retail landscape—in which Sephora and TV retailers have morphed from a hospitable landing spot for newbies to powerful channels with more-stringent trade terms—have made smaller brands seem like a more risky bet to strategic buyers. “It’s harder and harder to buy small,” says Joyce Greenberg, ceo of CAP Greenberg. “It used to be that Sephora and TV retail provided a platform for small brands… Distribution has become very expensive, and more difficult for a new brand to obtain.”
To garner genuine interest from strategic buyers, Shaun Westfall, a managing director at Piper Jaffray, says a brand generally needs to meet three core criteria. “First, the business should benefit from distribution and relevance in three major accounts or channels—such as Sephora, Ulta and a direct channel like QVC—and at least a toehold internationally. Next, a brand needs to demonstrate a set of high-replenishment hero products. Lastly, you need to show success and brand awareness across multiple geographies and demographics,” he says. “Once you have met all three, you become highly valuable. Strategics will pay more for less risk.”
He says that when companies hit all three of these marks, multiples can reach 2.5 to 4 times revenue and double-digit earnings before interest, taxes, depreciation and amortization levels.
In terms of category, skin care still attracts the most interest from buyers, but there’s more activity swirling around color cosmetics thanks to the success of Urban Decay, which was purchased by L’Oréal in late 2012, and Lauder’s Smashbox. Steven Davis, a managing director at Intrepid Investment Bankers, expects color to remain an active space. “There are a number of color cosmetics firms owned by entrepreneurs that are doing well, and private equity groups have significant investments in good color cosmetics brands,” says Davis.
One of those brands is Too Faced Cosmetics, one of the last of the indies established in the late Nineties to resist a buyout offer from a large beauty firm. The private equity firm Weston Presidio acquired a majority stake in Too Faced in 2012, but cofounder Jerrod Blandino insists the fun, flirty makeup-artist brand is not for sale. “We are not looking to sell. We’ve never talked about that. We’ve had major giants contact us but we are happy and fulfilled,” says Blandino. Referring to Weston Presidio’s involvement, he says, “They help guide us and fund our growth. They don’t get in our way. They’ve helped propel us.”
NYX Cosmetics, which recently tapped investment bank Piper Jaffray in its search for a buyer, is getting lots of attention for its makeup-artistry positioning and social-media prowess. Founded in 1999 by Toni Ko and often referred to as the “MAC of mass,” NYX has recorded an average annual growth rate of almost 50 percent for the last five years, according to the company, which declined to comment on talk of a potential sale. Its wholesale sales are said to surpass $100 million, according to industry sources.
NYX’s use of social media—vloggers love the brand—has allowed the company to achieve higher margins than a typical mass color brand, says one financial observer.
A brand’s ability to leverage social media is also a crucial element when it comes to attracting attention. “Some incumbent firms have a harder time doing that and are learning to leverage their capabilities,” says Jennifer Baxter Moser, a managing director at TSG Consumer Partners. “The smaller brands don’t compete in either print or [any other] traditional advertising strategies, but are able to use digital and social media to scale quickly and compete with the larger companies.”
In her view, these companies provide value to consumers in ways that traditional brands sometimes are unable to deliver, whether it’s innovative products or different price points.
Davis at Intrepid says that while color is gaining in popularity, skin care is still a favored category. “The complexity of color can scare away some potential acquirers,” he says. “In skin care, the firms that could attract a little more attention are those that have some technological angle associated with the product.” Antiaging skin care is still an attractive market, he says, adding that men’s skin care—although still in the early innings of development—is another category that could gain traction.
Investors are also closely watching the device category. Andrew Charbin, a vice president at investment banking firm The Sage Group, says, “One industry space that seems to be gaining more attention is the beauty tools and device sector.” L’Oréal’s acquisition of Clarisonic in 2011 and the recent Iluminage Beauty venture between Unilever and Syneron Beauty are two of the more-recent developments that have brought attention to this space. “Strategic buyers are always creating formulas for new products, and the tools and device category brings an added dimension of engagement to the consumer experience, combining hard and soft technologies, not to mention the potential there is from a marketing and distribution perspective to cross-sell and make claims of optimized efficacy,” says Charbin.
On the international front, a growing number of Asian buyers are active in the beauty M&A space, whether it’s Western multinationals looking to expand their footprint eastwards with brands that are relevant to consumers in emerging countries, or Asian companies looking to become bigger players in the West.
“Asia-based companies are becoming real players in M&A processes, and their objectives are changing,” says Vennette Ho, a managing director at Financo. “It used to be they only wanted to buy brands that had proven success in Asia. Now they are also looking at brands that extend their reach beyond Asia.”
Kosé’s recent acquisition of Tarte Cosmetics has amplified the growing trend of Asian companies buying foreign brands, often to gain a foothold in markets outside of Asia, such as the U.S. Within the last three years, Pola Orbis Holdings Inc., a leading Japanese player, purchased two skin-care companies, namely Australia’s Jurlique Group and the U.S.-based H20 Plus. Shiseido Co. Ltd. has also expanded its presence well beyond Asia with bold acquisitions such as Bare Escentuals in 2010. In some cases, Asian companies are also the sellers. In February, Shiseido agreed to sell two brands, Carita and Decléor, to L’Oréal.
The same trend is happening outside of Japan in Korea. Andrew Postal, a managing partner at advisory firm Marketing Management Group Inc., which works with Korean firms, says that many of them are now “looking outside of Korea for growth. One place is China, but they are also looking at the U.S.” Postal explains that they are looking at brands to bring back to Korea, as well as how to bring their home-grown brands overseas. At press time, for example, Korean giant LG Household & Healthcare Ltd. was reportedly considering a bid for Elizabeth Arden, among other companies.
Observers expect all of these dynamics to further accelerate the pace of deals this year, particularly with beauty companies and private equity firms armed with money to invest in expanding their portfolios. William D. Busko, a managing director at investment banking firm Consensus Advisors, says, “Beauty has been an active sector across all investment classes, whether venture capital, private equity or traditional and nontraditional strategic buyers.”
Says Financo’s Ho, “Good brands that exhibit good growth are always attractive targets. If you are a willing seller, it’s just a matter of timing.”
THE TOP 10 TARGETS
Only a handful of brands listed below are actively on the market, but many of them have attracted financial investors, such as private equity firms, aiming to take them to the next level. And once they hit $50 million in wholesale sales, large global beauty companies come calling.
NYX Cosmetics—This indie mass-market brand—highly touted for its makeup artistry positioining—has recorded an average annual growth rate of almost 50 percent for the last five years. It is now looking for a buyer and has tapped investment bank Piper Jaffray for the purpose. Company size: more than $100 million in wholesale sales (est.).
Nuxe Group—This natural French skin care and spa brand has been growing at double-digit clip over the past 10 years. President and chief executive officer Aliza Jabès, who has nutured Nuxe into a global brand sold in 64 countries, is said to have recently turned down interest from a minority investor. Company size: $210 million in wholesale sales (est.).
Perricone MD—The namesake brand of Dr. Nicholas Perricone rose to prominence with the wave of doctor brands in the late Nineties, and aims to continue to push traditional boundaries in skin care with products, such as No Makeup Skincare and Blue Plasma daily peel. Its owned by TSG Consumer Partners and is actively on the market, represented by Goldman Sachs. Company size: $75 million to $100 million in wholesales sales (est.).
Carol’s Daughter—Founded by Lisa Price in 1994 in her kitchen, the natural skin and hair care brand later attracted a team high profile investors lead by Steve Stoute, fueling its expansion to Sephora and the opening of its own shops. Sources said the company was recently looking for a buyer, but pulled out of the process and began expanding its reach to the mass market through a partnership with Target. Company size: $40 million to 50 million in wholesale sales (est.).
Strivectin—The clinical skin care company, best known for its stretch mark cream-turned-wrinkle fighter, was purchased by private equity firm Catterton Partners in July 2009. It has since been reformulated, repackaged and repositioned, and in 2012 StriVectin is said to haved tapped Goldman Sachs to explore a sale. The firm shelved the process, but is expected to return to the market in the future. Company sales: $100 million wholesales sales (est.).
Ahava—The Isreal-based skin care brand, which touts products formulated with Dead Sea minerals, repackaged and rebranding its line three years ago to call attention to its natural roots. Sources say it was recently on the market, but the process stalled. Company size $50 million in wholesale sales (est.).
Yes To Inc.—The skin care franchise best know for its plucky Yes to Carrots range has grown to include Blueberries, Cucumbers, Grapefruits and Tomatoes offerings, as well as hair and baby care products. The mass market brand is said to have hired Deutsche Bank to explore a sale several years ago. Company size: $50 million to $60 million in wholesale sales.
It Cosmetics—Former TV news anchor Jamie Kern Lima founded the problem-solution color cosmetics line six year ago with her husband Paulo Lima. It’s since landed on QVC and in Ulta doors, and attracted minority investments from both TSG Consumer Partners and Guthy-Renker. Company size: $60 million to $70 million in wholesale sales.
Too Faced Cosmetics—Founded in 1998 by Jerrod Blandino and Jeremy Johnson as a feminine, flirty and fun antidote to serious makeup artist brands, Too Faced is one of the last cosmetics brands of the Nineties era that has not been purchased by a large beauty firm. The private equity firm Weston Presidio acquired a majority stake in Too Faced in 2012, but Blandino insists there are no plans to sell. Company size: $70 million to $100 million in wholesale sales.
Caudalie—The a spa and skin-care line rooted in the French wine country of Bordeaux has steadily built its business across Europe, North America and Latin America, and is now turning more attention to Asia. The line, founded husband and wife team Bernard and Mathilde Thomas nearly 20 years ago, is often mentioned as a target by investment bankers, but is not exploring a sale. Company size: $70 million to $80 million in wholesale sales (est.).