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What to Watch: Beauty’s M&A Backload

Deals are projected to outpace those of last year.

The beauty deals are coming.

M&A in 2017 is likely to be backloaded, according to industry experts. The front half of the year has seen some transaction activity — Ares Management got into the beauty game with the $260 million acquisition of DevaCurl from Tengram Capital Partners, Unilever took over Hourglass, and CVC Capital paid more than $1.4 billion for mass-market conglomerate PDC Brands, sold by Yellow Wood Partners.

“Last year was one of the greatest vintages ever in terms of number of deals but more particularly quality of assets — we’re at pace to slightly pop the number of deals,” said Andrew Shore, managing director at Moelis.

Even with the deals already completed in 2017, plus the ones of prior years (NYX and Urban Decay, bought by L’Oréal; Becca and Too Faced, bought by Estée Lauder, plus others, bought and sold by private equity firms) — the appetite for more exists. For the big companies, the M&A drive is growth oriented. For Lauder for example, Too Faced and Becca created half of the group’s growth in the latest fiscal quarter, responsible for about $100 million in sales. Established beauty players are also looking to buy innovation.

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“What has happened recently, is you’ve seen the most successful, largest indie brands get acquired,” said Shaun Westfall, managing director at Jefferies, who has worked on big deals such as NYX’s sale to L’Oréal. “That’s been something that’s been building for 10-plus years. These brands have scaled themselves with Sephora and Ulta Beauty and social media.”

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While many of the larger indies have already sold, industry sources have said there are still loads of companies in the market, looking to either raise capital or sell — but for the most part, the companies are smaller than in years past. Andalou Natural, Dr. Brandt, Lime Crime, Mychelle Dermaceuticals, Nest and Tatcha have all been said to be in search of a deal.

MyChelle products.
MyChelle products. George Chinsee

As more companies flood into the market on the entrepreneurial side of the equation, more private equity firms have entered the fray — upping competition for increasingly tiny brands, which are considered riskier investments than more established ones.

“A lot of PE firms are catching on to what TSG has done, what L Catterton’s done — TPG’s done well — it’s a realization that other firms have made a lot of money in the sector, and they want to follow in that path,” said Arash Farin, managing director at the Sage Group. “It definitely makes it more competitive, and leads to higher valuations over time.”

Those valuations are generally expected to stay high, financial sources noted, and founders are well aware of the 6.1 times multiple of IT Cosmetics and 5.5 times multiple of Too Faced.

“Generally everybody looks at the last marquis trade and says, ‘Oh, I should have that multiple, too,’ but the value of a sale is much more complicated,” Westfall said.

As the companies up for sale become smaller, so do the multiples, many sources said. “Many don’t have real infrastructure in place, which becomes difficult for financial and strategic buyers,” one financial source said. “The companies seeking money are for the most part small, fast-growing but not necessarily proven, and come with a lot of operational risk.”