By and and  on November 6, 2009

PARIS — As the beauty sector begins to shrug off the effects of the recession, it is emerging flush with dealmaking activity.

“Companies are back working on acquisitions,” said Ariel Ohana, partner at Paris-based Ohana & Co. investment bank. “There’s been a real change in the atmosphere in the last few weeks. There’s probably a feeling that in terms of consumer spend, the worst is behind us. So people are positioning themselves now to make acquisitions.”

While merger-and-acquisition activity percolates, strategic buyers are coming to the fore. Beauty brands strong in alternative channels, such as television shopping or specialty retailing, are considered to be among prime candidates for takeover, as are natural or eco-friendly brands, experts agree. What’s more, fragrance licenses are being signed and changing hands at an ever-faster rate.

On Thursday, Lornamead, the Camberley, U.K.-based beauty manufacturer, announced it has agreed to sell its Yardley business in Asia, the Middle East, Australasia and some African countries to Bangalore-based Wipro in a deal weighing in at $45.5 million plus an earn-out.

“With the crisis that we went through, this became a buyers’ market, and the big winners in particular are the strategic buyers as opposed to the financial investors,” said Ohana, citing as an example Unilever, which in late September made a binding offer to snap up Sara Lee Corp.’s

personal care business for 1.28 billion euros, or $1.9 billion at current exchange, in cash. “Eighteen months ago, it might have been an acquisition made by a private equity fund.”

Such a shift has taken place since it is now harder for financial buyers — in any sector — to obtain funding to make acquisitions. Whereas private equity players had been able to secure acquisition financing to the tune of four to five times earnings before interest, taxes, depreciation and amortization, post-credit crunch, that multiple has been reduced to two to three times EBITDA, an industry source said.

“The strategic players hardly have any competition when it comes to making buys,” said Ohana.

“The interest of the big strategic players is extremely present,” concurred Michel Dyens, chairman and chief executive officer of Paris-based investment banking firm Michel Dyens & Co. “They are very keen. For strategic buyers, it’s a great time to act. Except for the very high end of the market, beauty has been pretty stable.”

That’s not to say financial investors are out of the picture altogether. Beauty happens to be one of the few fields in which private equity buyers have been showing continuing interest, said Dyens.

“There’s an opportunity to drive harder for better value deals,” said Mike Jatania, ceo of Lornamead, speaking of the overall playing field. “We will also see a reemergence of vendor financing, where the vendor helps to fill in the gap in financing. Another area that will emerge is distressed deals.”

“Many beauty companies have surprisingly limited — or no — cash flow and earnings, even with 70 percent gross margins,” said Alexander Panos, managing director of TSG Consumer Partners, the New York-based private equity firm. “The selling costs involved are substantial. So after that, there is just not much, if anything, left for growth.”

To be sure, M&A activity in the beauty sector has picked up in recent months.

Sanofi-Aventis said it would buy Laboratoire Oenobiol, the French maker of nutritional, health and beauty supplements, for an undisclosed sum. Steiner Leisure Ltd. agreed to acquire Bliss Worldwide Holdings Inc. from Starwood Hotels & Resorts Worldwide for $100 million. It has also been reported that Duke Street private equity firm is to auction off Simple Health & Beauty.

Done deals include Sally Beauty Holdings Inc.’s Beauty Systems Group LLC buying Shoeneman Beauty Supply Inc. for $61 million in cash, while Johnson & Johnson Consumer Products Co. inked a licensing agreement for full control of Korres branded beauty products in North America.

And industry sources reckon big groups, like Unilever, are still acquisitive.

“L’Oréal remains ready to buy, but it remains selective about what it wants,” said an industry source. “We will see an emergence of European companies looking to make acquisitions. Reckitt Benckiser has got further firepower and SC Johnson continues to look at a lot of things, though it’s risk averse. There are also going to be companies from Asia. Asian players will look at taking advantage of the market. European companies will be looking to buy U.K. assets, as this is a great time for them to make acquisitions with the euro and pound almost at parity.

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