The deals will go on.
After one of the most robust years in beauty acquisitions, the trend is expected to continue into 2017, driven by two key factors: large corporations that are looking to buy innovation instead of develop it, and private equity firms who are hungry to invest in growing brands with the hope of one day selling to a large strategic for a big return. “M&A is the new innovation,” says Andrew Shore, managing director of consumer products investment banking at Moelis & Co.
There’s a necessity on the part of a lot of the big companies to keep buying innovation, and that’s going to drive the desire for a lot of these purchases,” agrees Wendy Liebmann, chief executive officer at advisory firm WSL Strategy Retail.
The deals rolled in during 2016, including Johnson & Johnson’s purchase of OGX, the Estée Lauder Cos.’ deals for Too Faced, Becca Cosmetics and By Kilian, L’Oréal’s acquisitions of It Cosmetics and Atelier Cologne and Shiseido’s purchase of Laura Mercier, Révive and the Dolce & Gabbana fragrance license. On the private equity side, Tengram Capital Partners bought Algenist and Alliance Consumer Growth invested in Pacifica. But just because many major beauty players have been on acquisition sprees for the past few years doesn’t mean they’re going to stop anytime soon. “Without any material movement within the economy as a whole, beauty and personal care will continue to have a terrific year next year,” says Steve Davis, managing director at Intrepid Investment Bankers, speaking in terms of M&A.
Because so many of the deals for 2016 were for makeup brands, the focus for 2017 is expected to shift to include other categories, as few sizable color cosmetics companies are left on the market. But a handful—notably Anastasia Beverly Hills—whose founder Anastasia Soare publicly said she was not interested in selling last May—are still considered in demand. Sources also indicated that Laura Geller, Cover FX, Mineral Fusion and Julep may come to market in 2017, and that Josie Maran, the argan oil-focused brand with a color cosmetics component, is seeking investment.
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“Makeup is the most desired category today because the category itself is growing as fast as it is…[but] I question the sustainability of growth given how strong the category is in what seems like 18-plus months into the cycle of this pretty big acceleration,” says Stifel analyst Mark Astrachan. “Skin care lasted five years in growth mode and peaked two years in.”
“Most of the aggressive [M&A] behavior has been in prestige color, so there’s a natural conclusion one might draw that the larger prestige color brands that were for sale have traded; so you may expect to see a bit of a slowdown there,” says Richard Gersten, a partner at Tengram, which owns many of the brands said to be in play including Laura Geller, Devacurl and Nest.
That leaves hair care, skin care and fragrance poised for increases. (Industry experts predicted nail-related deal flow would be relatively inactive). “There’s no slowing down right now,” says Vennette Ho, managing director at Financo. “With all of the push-down on size from both strategics and private equity, nothing is too small these days.”
Many analysts are looking to hair care as the next hot category. “There’s this trend known as the skin-ification of hair,” says Arash Farin, managing director at The Sage Group. “In skin, there are so many different regimens. In hair care, there are companies that have that mentality…if the [intellectual property] is [differentiated] and they understand the needs of customers who are traditionally underserved, they will be very hot.” Industry sources expect Devacurl, which specializes in products for curly hair, and Living Proof, which uses patented technology, to come to market. Oribe may also trade hands, sources report, noting that an ongoing lawsuit between Oribe the hairstylist and brand owner Luxury Brand Partners could hinder any potential transactions.
Plenty of acquisition opportunities still exist in skin care, though some of the deals may be smaller than in other categories. “Skin has been underplayed relative to makeup. There are still opportunities where there is value,” says a financial source.
Dr. Brandt, the line of the late dermatologist, is expected to be up for sale next year. Other brands that may be up for grabs include Perricone, MyChelle and Drunk Elephant. “It’s definitely clear that the stage is set,” says L2 chief strategy officer and cofounder Maureen Mullen, who singles out brands that do well on Amazon, including Radha Beauty and Pure Body Naturals, as potential targets. “Skin care deals tend to be bought up earlier in the cycle, whereas you really don’t see a lot of action around color cosmetics companies until they are of scale,” Davis says.
Fragrance is expected to see moderate deal activity. Perfume and home fragrance business Nest is expected to sell next year, sources say, and Indie and artisanal fragrances are expected to continue to garner buyer interest. Fragrance buyers, sources add, are more likely to be of the strategic variety than private equity. “From the companies that I see, there’s considerable appetite for [M&A],” says Astrachan. “If you’re growing and you’re in a growth category and growth geography, you’re going to be wanted.”