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Will Macro Economic Turmoil Finally Burst Beauty M&A’s Bubble?

The beauty M&A pipeline is lighter than in previous years, experts said.

The markets are melting down, inflation is at record levels and the geopolitical climate is under pressure. Combine that with the ongoing pandemic, and beauty insiders are wondering if the stratospheric M&A scene is going to be grounded — at least in the near future. 

More than two years into a global pandemic, the economy is rattled, and the world’s macro factors may be about to pierce beauty’s M&A bubble. There were a flurry of completed transactions in the fourth quarter of 2021 and in early 2022 — Procter & Gamble alone bought three companies in three months between November and January. But looking ahead, several bankers have said their pipelines for the rest of the year are looking light.  

Normally, the beauty market is fairly resistant to external chaos. Even at the high end, beauty products are considered affordable luxuries and historically, consumers are loath to give up their routines, instead cutting back in other areas. See, Leonard A. Lauder’s Lipstick (turned-moisturizer-turned-back-to-lipstick) Index, the mogul’s theory that beauty sales increase during tough economic times. 

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While that may hold true — makeup sales are rebounding at Ulta Beauty, E.l.f. Beauty and other companies — there are signs that other areas of the industry’s ecosystem, namely M&A, may be in for a slowdown. 

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“The market is a little bit more challenging now than it was a year ago or six months ago, and that has to do with the general economic environment, the uncertainty being driven by inflation, interest rates, geopolitical stuff going on in Eastern Europe,” said Marko Horvat, director at Raymond James. He added that even against that backdrop, M&A continues to be a strategic focus for beauty’s big players. 

“Anytime there is uncertainty in the economy or the public equity markets, that has spillover effects into the private market,” Horvat added. “It’s M&A as a whole that tends to pull back when the macro environment is challenging.”

While the beauty M&A market is by no means closed — as of press time, Nest and Hero Cosmetics had been said to be in the market, and Byredo and Nutrafol had just inked major strategic deals with Puig and Unilever, respectively — it is slower than it’s been in the past several years, sources said. 

“There’s certainly a slowdown. The pipeline is light,” said Nadia Pelaez, director at RBC Capital Markets Consumer & Retail Group, comparing it to previous years that were jam-packed. “There’s only a handful of assets in the market right now that are sizable, certainly not the level of activity we saw last year.”

Since the beginning of this year, many of the deals out are companies looking for growth equity investments, or evaluating valuation potential, she noted. 

Part of the reason it’s slower now was the uptick in fourth-quarter deals, with transactions including L’Occitane’s acquisition of Sol de Janeiro, Edgewell’s purchase of Billie and L’Oréal’s purchase of Youth to the People.

“Even though it was busy, that doesn’t necessarily mean the next quarter can’t be busy. A lot of it is that uncertain economic environment, because right now financing markets are challenging, those deals that got done last year or carried over to the beginning of this year, the valuations have been inflated. And in light of this uncertain economic environment, people are just being a little bit hesitant to deploy capital,” Pelaez said.

Private equity firms are currently being “more selective” because of the economic environment, Pelaez said, but companies with good cash flow, profitability, growth and marketplace differentiation will still be able to garner a high multiple.

But, when private equity firms go to underwrite a deal as having the potential for a strategic exit, and the strategic buyers are trading lower because of market conditions, it may present a problem, said Threadstone LP managing director Ilya Seglin. “You go into your committee with actual real-time comps, and your real-time comps are not looking cute,” he said.

Today, strategic buyers are facing supply chain issues and raising prices, and “unless there’s a compelling or a transformative asset, it’s likely not the best time for them to transact,” Pelaez said.

One source noted that it is likely strategic buyers will continue to consider the occasional minority investment, especially since so many have set up internal funds to look at smaller deals.

If they are looking at outright acquisitions, it’s for capabilities, or businesses that add new channels, customers or product innovation capabilities, Horvat said.

Another side effect of the current landscape may be that deals simply take longer to get done, Pelaez said.

“People are still willing to entertain conversations, and I think the valuation environment remains pretty strong,” Horvat said.

The unknown is expected to have a significant impact, too. While right now consumer beauty spending remains strong, continued inflation is a risk, experts said.

“Spend is going to shift away from bigger ticket items — going out to dinner and things like that — people aren’t going to be altering their skin care routines,” Horvat said.

“I’m not necessarily seeing a slowdown in beauty spending, but I am more cautious about holiday. I’m not sure if in the economic environment we’re in now it’s going to be a blowout Christmas. People are still buying their moisturizers and lipstick and whatever, and everyone’s ready for hot girl summer so makeup is on fire,” Seglin said. “Everyday spending on beauty is still OK, but who knows where the consumer is going to be, and people are cautious.”

That could cause sales to stagnate for some brands, which has an impact on beauty M&A, as strategic buyers tend to look to acquire growth, Seglin said.

“What do they usually buy? They buy growth. If there’s not enough growth in the core brands, how do you get growth, you go buy it. To the extent some of the targets slow down as well, what are you actually buying?” Seglin said.

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