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Beauty’s Buying Binge

Deals are starting to percolate in beauty, and indie cosmetics darling Urban Decay is believed to be next in line.

Deals are starting to percolate in beauty, with Physicians Formula Holding Inc. attracting a buyer and indie cosmetics darling Urban Decay believed to be next in line.

This story first appeared in the August 16, 2012 issue of WWD.  Subscribe Today.

More companies are said to be in play, according to financial sources. For instance, Yes to Inc. — best known for its plucky range Yes to Carrots — is said to be working with Deutsche Bank, as is Urban Decay, while the clinical skin care brand StriVectin, which is owned by Catterton Partners, has reportedly tapped Goldman Sachs, as has TSG Consumer Partners, which owns Perricone MD, Alterna, Sexy Hair, Kenra and Pevonia. Additional brands seen as acquisition targets include Tarte Cosmetics, a mainstay on QVC that has received funding from the private equity company Encore Consumer Capital, and the botanical skin care brand Aesop.

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The Physicians Formula deal came as more of a surprise than a foregone conclusion.

The mass-market beauty brand had not sent off vibrations beforehand, but on Wednesday disclosed a full-blown definitive agreement with the private equity firm Swander Pace Capital for its affiliates to acquire the mass-market beauty brand for about $65 million, or $4.25 a share, in cash for all outstanding shares of common stock.

Upon the close of the deal, which is expected to take place later this year, Physicians Formula will be privately owned and continue to be overseen by the current management team, led by Ingrid Jackel, chairman and chief executive officer. The company and its employees will continue to be based in Azusa, Calif.

Physicians Formula stated that its board unanimously approved the merger agreement and recommended shareholders vote in favor of the deal.

Jackel stated, “We are pleased that Swander Pace has agreed to purchase our company. The firm has a record of success in acquiring and operating companies in the consumer space, and we believe they will add value to our business as we continue to successfully execute our growth initiatives.”

Mo Stout, a manager director at Swander Pace, stated, “The acquisition of Physicians Formula reinforces Swander Pace’s investment focus on lower middle-market consumer products industry companies. Physicians Formula is a pioneer in the cosmetics industry, and we are committed to working with its management team on this next stage of growth and innovation for the company.”

Physicians Formula, founded by Dr. Frank Crandall in 1937, has built its business in the mass market with a full assortment of “problem-solution” color cosmetics. The company’s net sales in 2011 were $80.9 million, up 3.1 percent from $78.5 million in the prior year. It added skin care to the fold in 2011, with the launch of a 14-stockkeeping-unit cosmeceutical range called Physicians Formula Skin Care at Wal-Mart. This year, the line is slated to roll out to more than 8,000 doors across multiple retailers, including CVS Pharmacy and Ulta, and regional chains such as Fred Meyer and Bartell Drugs.

That expansion helped to drive a double-digit sales gain in the second quarter. On Tuesday, the company reported net income for the quarter was $2 million, or 13 cents a diluted share, compared to a net loss of $328,000, or 2 cents a share, in the year-ago period. Net sales for the three months ended June 30 gained 25.2 percent to $26.1 million, compared to $20.9 million in the same period last year.

The deal confirms private equity firms continued interest in the high-margin beauty business. Given the large number of beauty firms believed to be up for sale this year, private equity will be increasingly battling strategic buyers for the most attractive assets.