By and and  on January 24, 2008

PARIS — YSL Beauté has a new owner in view, and it's none other than L'Oréal.

The French beauty giant on Wednesday proposed to pay PPR 1.15 billion euros, or $1.68 billion at current exchange, for YSL Beauté Holding, including its Roger & Gallet subsidiary. YSL Beauté is part of the PPR subsidiary Gucci Group.

Once the agreement is completed, which is expected in coming weeks, L'Oréal would obtain an exclusive and very long-term worldwide license for the use of the YSL and Boucheron brands in the fragrance and cosmetics categories, under market conditions. Also under terms of the agreement, L'Oréal would take over YSL Beauté's licenses for the Stella McCartney, Oscar de la Renta and Ermenegildo Zegna brands in the fragrance and cosmetics categories.

PPR would continue to own the Yves Saint Laurent, Boucheron and Stella McCartney brands. Meanwhile, the beauty license of Gucci Group brand Alexander McQueen would not be part of the transaction.

YSL Beauté's brands would join L'Oréal's luxury division, which already includes Lancôme, Biotherm, Helena Rubinstein, Shu Uemura, Kiehl's and Parfums Giorgio Armani, among other names.

"This proposed agreement represents a great opportunity for L'Oréal and its luxury products division," said Jean-Paul Agon, L'Oréal's chief executive officer. "Yves Saint Laurent is a mythical French luxury brand. It is admired the world over and is particularly complementary with our current brands. We are convinced that its integration into our luxury products division would speed up its development. This strategic agreement will reinforce our position in the luxury cosmetics market."

The latest deal continues Agon's aggressive acquisition strategy since he succeeded Lindsay Owen-Jones as L'Oréal's ceo in April 2006. Just one month prior to the changeover, while Agon was ceo-designate, the company snapped up The Body Shop. And since then, L'Oréal's buys have included Sanoflore, Beauty Alliance, PureOlogy, Maly's West, Canan and Columbia Beauty Supply.

During a financial analysts' meeting in September, Agon explained his strategy, saying, "You should only make an acquisition when it makes true strategic sense. Mr. [Christian] Mulliez [the company's executive vice president of administration and finance] and his team have never had as much work to do in terms of acquisitions because our philosophy now is to look at absolutely everything, to scrutinize all of the opportunities out there. That doesn't mean we're going to make more acquisitions, but we're not going to miss any acquisitions that are right up our street."We buy something because we feel that it is a good piece of the strategic puzzle," he added.

PPR executives say a strategic deal with L'Oréal comes with a multitude of pluses.

"With this strategic agreement with the world leader in cosmetics, Gucci Group gives YSL Beauté the opportunity to take full advantage of its upside potential," said François-Henri Pinault, chairman and ceo of PPR. "It also enables the Yves Saint Laurent brand, in the field of beauty, to fully align its ambitions with its worldwide reputation. Yves Saint Laurent would thus boost its position as a great luxury brand. With its expertise and knowledge of international markets, L'Oréal would be able to continue and step up the work already achieved to date. L'Oréal would also offer a unique development platform for the Roger & Gallet, Boucheron, Stella McCartney, Oscar de la Renta and Zegna brands."

Robert Polet, Gucci Group's ceo, said, "This agreement would be key for Yves Saint Laurent. The strength and expertise of L'Oréal would put the further development of the brand on a faster track. The collaboration between L'Oréal and Yves Saint Laurent Couture would assure the consistency of Yves Saint Laurent's brand image."

The news of a probable L'Oréal-PPR agreement quashes long-standing market speculation that YSL Beauté would become part of Groupe Clarins. For months, industry rumors swirled that PPR would offer its beauty division to Clarins in return for up to a 30 percent stake in the company, and even a right of first refusal if the company is eventually sold. Clarins' majority shareholders, the Courtin-Clarins family, steadfastly maintained their unwillingness to cede control of Clarins.

However, industry watchers weren't surprised PPR would ink a strategic agreement for YSL Beauté, pointing out that beauty is not core to PPR's business, which has a strong focus on retail and luxury goods. PPR's retail banners include Conforama for furniture; Fnac for books, music and electronics, and the catalogue division Redcats. In luxury goods, PPR's holdings include Gucci, Bottega Veneta, Balenciaga, Boucheron and Sergio Rossi. Most recently, PPR acquired a controlling stake in activewear firm Puma.

PPR's holding company Artemis acquired Sanofi Beauté (whose beauty business — today called YSL Beauté — represented 85 percent of its sales and whose Yves Saint Laurent fashion business, minus couture, generated the rest) in March 1999 for $1 billion. Artemis then flipped the business to Gucci Group in November 1999, creating a new luxury goods conglomerate to rival LVMH Moët Hennessy Louis Vuitton. At the time, beauty industry executives and financial analysts alike were convinced Gucci would sell at least a few of the beauty brands to recoup some of the money. But Gucci's then chairman, Domenico De Sole, and then chief financial officer, Robert Singer, said repeatedly they planned to hold on to all the brands."The beauty businesses are profitable, and they will remain profitable," De Sole said. Singer said later that Gucci intended to make "significant investments" in the beauty business.

Although it has shown improvements recently, YSL Beauté has been among the underperforming businesses at PPR in an increasingly competitive market for fine fragrances. In the first half of 2007, the beauty division swung into the black, posting recurring operating income of 21 million euros, or $27.9 million at average exchange, versus a loss of 5 million euros, or $6.1 million, in the prior-year period. The company credited the improvement to a leap in manufacturing productivity and a restructuring plan that reduced expenses. YSL Beauté's sales reached 290 million euros, or $386 million, up 5.8 percent, in the half.

The YSL brand's recent major fragrance launches include the women's scent Elle last fall and the men's fragrance L'Homme Yves Saint Laurent in fall 2006.

In recent years, YSL Beauté has been roiled by management changes and restructuring. In 2007, Chantal Roos departed as its president and ceo and Maggie Ciafardini as ceo and managing director of the division's U.S. business. (Those positions were filled by Andrea Barbier and Marc Rey, respectively.) In 2006, YSL Beauté sold its factory in Bernay, France, and trimmed 118 jobs from its Neuilly-sur-Seine, France-based headquarters. That number represented about 10 percent of its French workforce.

The largest part of YSL Beauté's business stems from fragrance, which in 2006 generated 66 percent of its overall revenues. That year, cosmetics (which reportedly clocks double-digit gains) followed, with 28 percent, and skin care, with 6 percent. Also that year, Europe produced 70 percent of YSL Beauté's business; North America, 14 percent, and the rest of the world, 16 percent.

In the first half of 2007, L'Oréal generated sales of 8.51 billion euros, or $11.3 billion at average exchange, a 9.4 percent increase against the same prior-year period. Total operating profits at L'Oréal, including The Body Shop business (consolidated since July 1, 2006), came in at 1.44 billion euros, or $1.92 billion, an 8.1 percent gain. L'Oréal's operating profit as a percentage of sales was 16.9 percent.

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