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What to Watch: The Beauty M&As Expected in 2019

The M&A momentum is expected to continue through the year, and brands and back-end operations are seen as hot targets.

Beauty M&A is expected to continue its hot streak through 2019.

The sector has seen a flurry of M&A activity in recent years, especially on the brand side. Newer to the equation are the beauty manufacturers, which are expected to start trading at multiples that rival brands.

“We’ve seen continued activity across the board on the branded side, no question — I don’t expect that to slow down,” said Susan Roddy, director at Houlihan Lokey. “One of the unspoken stories that doesn’t get as much attention, but certainly has been prolific in 2018, and we’ll see even more in 2019, is the supply chain.”

There were several behind-the-scenes transactions in the beauty industry last year, and some of them are starting to rival the multiples paid for brands. Cornell Capital’s acquisition of KDC labs was one example: At a multiple of 11.5 times earnings before interest, taxes, depreciation and amortization, that deal rivaled the multiple of some beauty brands.

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“If you invest in a contract manufacturer of formulations or packaging, you can essentially have a portfolio of brands so you’re not betting on any single one of them, but still getting the benefit of overall growth,” said Roddy. “We’re seeing a lot of interest in contract manufacturing, particularly those that have been able to show they have differentiated capabilities [and are] doing something besides just filling [bottles].”

A lot of new, indie brands are marketing driven, Roddy said, and are looking for companies that can help handle behind-the-scenes tasks like operations, product development and supply chain. “Anyone that can come and service thee brands and help with that back-office function can truly be a valuable partner,” she said.

Outside of manufacturing deals, many brands themselves are expected to be up for grabs.

The Beauty M&A Expected in 2019
Beautyblender’s Bounce foundation.

There are a few larger assets out in the market. Space NK, which sources said tapped Goldman Sachs for a process, is still out there. Combined with the Space Brands (Lipstick Queen and Eve Lom), that business is said to have about $200 million in sales. There’s also Beautyblender, which is working to build out its makeup offering and said to be doing $150 million in retail sales. French anti-aging skin-care brand Filorga is also said to be hitting the market in February next year, with Goldman Sachs and BNP Paribas, sources said.

There are also some sizable corporate divestitures coming to market. Johnson & Johnson is said to be looking to sell Roc, Bayer is considering strategic alternatives for Coppertone, and Nestlé is doing the same for Nestlé Skin Health, which has a range of aesthetic products in addition to Proactiv and Cetaphil.

More mid-sized options include Nu Face, which is said to have tapped Intrepid to evaluate options. That business, which makes micro current and LED skin-care devices, is said to have $40 million in net sales and $4 million in earnings before interest, taxes, depreciation and amortization. Goldman is said to be shopping Sun Bum, which sources estimated has well over $50 million in sales.

The Beauty M&A Expected in 2019
Elemis is said to be doing about $140 million in sales.

A slew of skin care companies are expected to be in the market, either looking to sell or raise growth capital, in 2019. There’s Drunk Elephant, the VMG-backed indie skin-care darling, which is said to be in the process of hiring a banker. Bids were due in late December for Elemis, which is expected to do $185 million in net sales for 2019, as part of a process being run by Jefferies and Normura, sources said. Strivectin, which sources said has about $80 million in net sales and has returned to profitability, is also up for grabs. Houlihan Lokey is running that process, sources said. Perricone is also said to be back in the market with Piper Jaffray, as is professional skin-care business Envy Medical.

There’s also Nuxe, which sources said Rothschild has been tapped to explore, as well as Wetbrush, which is said to have hired Intrepid, and Jane Iredale, which sources said hired The Sage Group to look into deal options. This Works, the wellness and beauty company, is said to have hired Baylor Klein to look into options as well. Cos Bar, too, is said to have tapped Threadstone to do a growth capital raise, and sources said that Financo has been hired to do a capital raise for BeautyBio. 

M&A isn’t the only type of deal the industry is talking about for 2019. Several companies are said to potentially be on the IPO track — PDC, Morphe and Glossier, among them.