By and  on March 20, 2006

LONDON — L'Oréal plans to snatch The Body Shop.

The French beauty giant, confirming weeks of speculation, announced Friday that it will make a cash bid to acquire the British ethical manufacturer and retailer. It will offer 300 pence per share, or $5.27 at current exchange, valuing the company at 652 million pounds, or $1.14 billion.

"A partnership between our companies makes perfect sense," L'Oréal chairman and chief executive officer Lindsay Owen-Jones said in a statement. "Combining L'Oréal's expertise and knowledge of international markets with The Body Shop's distinct culture and values will benefit both companies.

"We are delighted that The Body Shop's board has agreed to unanimously recommend our offer to the company's shareholders. We look forward to working together with The Body Shop's management, employees and franchises to fulfill The Body Shop's independent potential as part of the L'Oréal family."

L'Oréal indicated it was interested in The Body Shop in late February, but at that time said it had not approached the company about an acquisition.

L'Oréal has received a commitment from The Body Shop founders Anita and Gordon Roddick, who hold about an 18 percent stake in the company, and from the firm's directors, who hold 3.6 percent, to accept the offer. There is also a call option, or the right to buy shares at a predetermined price, on Ian McGlinn's 21 percent holding. McGlinn lent the Roddicks the money to start The Body Shop in 1976.

The L'Oréal family, which includes brands Lancôme, L'Oréal Paris, Maybelline and Giorgio Armani cosmetics, will be adopting something of a wild child. Fronted by outspoken Anita Roddick, The Body Shop has long rebelled against the corporate mentality epitomized by multinational conglomerates such as Paris-based L'Oréal. Roddick, however, is giving the deal her backing and will act as a consultant for The Body Shop and advise L'Oréal on community trade issues.

"It's not selling out," Roddick said at a London press conference. "And the assumption that I am sitting next to an enemy is one that is absolutely wrong."

"We wouldn't be here today if Anita had not said yes," Owen-Jones said at the conference. "For all Body Shop customers, the first thing they want to know is if Anita is going to stay." Owen-Jones said he has always admired the businesswoman. "Though sometimes she's said things to hurt me," he added.An interview with Roddick posted on The Body Shop's Web site revealed that she is bringing a still-feisty attitude to business to the table.

"Businesses aren't found in nature," she noted. "Businesses aren't deemed by God. They're made by men and women and they're subject to change. What you see I saw years ago as a battlefield; enemies are now our staunchest supporter. People change. They see the value of what small companies do. They want to learn from other companies. It's not deemed in nature because they're big and huge that they're going to diminish our DNA," she continued.

"It's inspiring to us that the world's largest cosmetics company knew how to seduce a firm like The Body Shop," said Owen-Jones at a Paris press conference also held Friday. "It has such a strong identity and positioning, and is so different. They accepted because we are passionate people, and with our expertise, we offer the best future security."

The Body Shop's executive chairman, Adrian Bellamy, and ceo, Peter Saunders, who are credited with turning around the manufacturer and retailer when they took the company's reins in 2002, will remain. The Body Shop will be run as an independent entity within the L'Oréal group, selling only Body Shop branded products, and management will report directly to ceo-designate Jean-Paul Agon, who is expected to take on the L'Oréal ceo title in April.

"I'm extremely positive about the deal," said Bellamy. "We'll be stronger as a part of the L'Oréal group than by sailing our own boat. We'll be able to share its global platform and experience. And we hope we'll make a contribution to their organization. We will fit very comfortably within the family; we have a lot of empathy together," he added.

L'Oréal indicated at a recent meeting for analysts that acquisitions would play a role in future development for the group under Agon, though organic growth will remain a focus. Since then, L'Oréal snapped up SkinEthic, a tissue engineering company based in Nice, France. The acquisition was a fitting preamble to the Body Shop deal since SkinEthic offers an alternative to animal testing.

For L'Oréal, The Body Shop will offer a new perspective on retail, an entry into the masstige market and an internationally recognized name with the potential to make a splash in developing markets. It's also an opportunity for the firm to be associated with the growing fair-trade movement.And it will bring in additional revenues. For the fiscal year ended Feb. 26, 2005, the most recent figures available, The Body Shop generated 419 million pounds, or $736.1 million.

The group has dipped its toes into retail in the past with a handful of stand-alone stores for brands such as Lancôme, L'Oréal Paris and Kiehl's.

"It's not a complete departure from what we do and from what we know," Agon said at the London conference, adding that in the U.S. alone, Lancôme runs 2,000 counters.

"It's a myth that L'Oréal has no retail experience," said Owen-Jones, adding that while it doesn't have a large network of doors, "we know a thing or two about talking to customers."

"I'm not surprised by the deal. L'Oréal has been looking to diversify into other forms of distribution, and we got the sense the company is interested in acquisitions at the last analyst meeting," said Sandy Beebee, a New York consumer analyst at HSBC. "Body Shop is a good fit for L'Oréal as it gives significant access to alternative retail channels like specialty stores, and it gives it at least minimal access to direct-sales business that has been doing relatively well."

The Body Shop's direct selling business, dubbed The Body Shop at Home, has been a major focus for the company lately and will continue to be a key element, executives said. "It's going to be the future growth [area] for The Body Shop," noted Roddick.

"[L'Oréal] has seen a lot of pressure in the supermarket sector from chains such as Tesco and Carrefour, which are so powerful and can put a lot of pressure on margins," said George Wallace, ceo of Management Horizons Europe, a London retail consultancy. "Vertically integrating The Body Shop gives it scope to develop in another channel that generally offers higher margins, rather than being squeezed by supermarkets."

Besides opening doors for L'Oréal to multiple retail channels, the deal could offer a concept that's easy to translate to emerging markets such as China, India and Russia.

"The Body Shop can succeed in all parts of the world," said Agon at the Paris press conference. "In France, it has very few boutiques, so there is a lot of development potential there, as well as in Eastern Europe. In the U.S., where there is very little penetration, there is huge potential. In Latin America, there are only a few stores in Mexico and in Asia there are several in Hong Kong. It is not present in China or in India. The globalization of The Body Shop is only just beginning.""Body Shop has a pretty good track record in opening new markets," said Steve Davies, a London retail analyst at Numis. The company operates 2,085 doors, many of which are franchised, in 54 countries worldwide.

The acquisition is also seen as an opportunity for L'Oréal to make a statement in the masstige beauty segment.

"Masstige is an interesting concept," said Agon at the Paris conference. "It's a category where products are more sophisticated than the mass market, but less expensive and more accessible than luxury brands in perfumeries."

"It is complementary," said Beebee. "Its image is natural and holistic, which is something L'Oréal lacks in its portfolio today. It is trying to develop credibility as a masstige brand, and L'Oréal can help them with that."

"It complements L'Oréal's portfolio, which was suffering from limited presence in affordable mass market brands," said Goldman Sachs analyst Jacques-Franck Dossin. "It had a policy of increasing price positioning for its mass brands in the last few years, so it was left with a gap at the affordable end of the market. This deal will help it partly bridge that gap."

L'Oréal's 300 pence offer will be welcomed by many shareholders, according to analysts.

"I would be excited if I had Body Shop shares," quipped Richard Ratner, an analyst at Seymour Pierce, London.

The L'Oréal bid will offer a 31.5 percent premium on the average closing mid-market price of 228 pence, or $4, for the six months up to and including Feb. 21, according to the group.

Ratner also noted that The Body Shop had been on the block in 2001. Omnilife of Mexico had been in preliminary talks to take over the company, but the deal fell through.

Analysts agreed that The Body Shop's value lies in its principles.

"It's big advantage is that it's distinctive," said Davies. "Whether you agree with it or not, it does stand for something."

"L'Oréal does a very good job at ensuring that its brands remain segmented," said Beebee. "It has done a good job at maintaining Kiehl's independence."Owen-Jones agrees. "I believe we can be good guardians of that principle," he said at the London meeting, "and stewards of a very beautiful idea."

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