Forecasting beauty M&A in 2018 is a cinch — there will be more deals.
The dynamics remain auspicious: Large beauty players will look for growth by acquiring smaller companies. An influx of beauty newcomers competing for deals will likely keep prices high. A lack of mid-size targets means deals are likely to be on the large or small side.
“While 2017 was one of the greatest vintages ever in terms of the quality of the assets, 2018 still seems to be a pretty prodigious year,” said Andrew Shore, managing director at Moelis & Co. “We’re just at the tip of the iceberg…I think the pendulum has begun to shift to skin and hair.”
“The beauty M&A environment will continue to be robust in 2018,” agreed Vennette Ho, managing director at Financo. “Even beyond the typical brand acquisition, we expect to see new entrants to the industry, big companies making small investments and folks playing all along the beauty value chain — from manufacturers to digital agencies to technology to retailers.”
Companies expected to come up for sale or complete an investment transaction in 2018 include Arbonne, Array Marketing, Cover FX, Not Your Mother’s, Derma E, Ouai, Farmacy, Milani and This Works, according to industry sources. Coty has also publicly said it hopes to sell a portion of its portfolio in 2018, and sources have indicated digitally native brands such as Glossier, which is said to be fund-raising again, or Thrive Cosmetics, could generate interest. Anastasia Beverly Hills has also been seen testing the market.
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Color deals are expected to slow slightly for 2018, as many large makeup companies have already been sold or taken investment. Plus, consumers and acquirers have taken a renewed interest in skin and hair care.
“You’ll see activity in a bit of a continuation with 2017 with skin and hair, and you’ll see some color peppered in there as well,” said Steve Davis, managing director at Intrepid Investment Bankers.
“I’m not sure chasing more makeup is necessarily what you’re going to see,” said Stifel analyst Mark Astrachan. “I’m not convinced of it.”
“The next generation of acquisitions are going to be the most digitally inspired, heavy in social media, heavy in influencer marketing and finding [differentiated] ways to consumers,” said Shaun Westfall, managing director at Jefferies.
“If anything, demand should increase because going into 2018 you’ve got all the pieces of the puzzle,” Intrepid’s Davis added. “All major strategics are active.…You’ve got a bunch of platforms in place and new platforms that formed in 2017 that didn’t exist [before].”
Davis is referring to an influx of players in the beauty space. New entrants in 2017 included Winona Capital, which recruited Space NK founder Nicky Kinnaird and Frederic Fekkai alum Lori Perella Krebs for Ancora, which invested in Indie Lee; Eurazeo, which hired former Estée Lauder Cos. Inc. executive Jill Granoff to head Eurazeo brands, which acquired Nest, and Warburg Pincus, which tapped former Revlon chief executive officer Alan Ennis for Glansaol, which bought Clark’s Botanicals, Julep and Laura Geller.
In addition to private equity interest, P&G got back into acquisition mode with the purchase of Native, and a group of executives, including Darryl McCall, who was with Coty and P&G, have joined to form a special-purpose acquisition vehicle, Legacy Acquisition Corp., that lists beauty as one of its focuses in filings with the U.S. Securities and Exchange Commission.
While the large public players — like the Estée Lauder Cos. and L’Oréal — may not have any obvious portfolio holes, it’s likely they will continue to make acquisitions that indicate what future trends they intend to participate in, according to Stifel’s Astrachan. In the U.S., large strategic buyers will also have more money to spend following tax reform, he noted.
Of all the beauty companies, Astrachan predicted Coty would be the most likely to “want to do material M&A” but said that right now, it is limited by the amount of debt it has on its balance sheet. But when the two-year anniversary of Coty’s Procter & Gamble specialty beauty portfolio deal closes in October 2018, it will free up the tax burden on the Coty shareholders, which could potentially set the company up to do another sizable deal, according to Astrachan.
“For these companies, it’s a question of what they think will be the trends they need to play in the future,” Astrachan said. “So skin care and natural skin care would be something any or all believe they’ll compete in, and it’s either innovate on existing products or acquire something new.”