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Will Coronavirus Quash Beauty M&A?

"While everybody tells you they’re open for business, most boards will not let cash leave a company right now."

Beauty M&A burned hot for years.

Appetites for fast-growing brands with digital capabilities were high. So were the prices, driven up by scores of new investors and intense competition for the best assets.

Not anymore, thanks to the coronavirus.

The COVID-19 pandemic has put almost all beauty M&A on hold, save for distressed assets and a few ongoing processes, like Charlotte Tilbury and the sale of Coty’s professional division, which one industry source described as “progressing,” despite reports that the deal had hit a snag.

Strategic buyers are centered around pivoting their own businesses as COVID-19-related store closures persist, and on what they may need to do to adapt to the future beauty retailing landscape when stores reopen, sources said. Some private equity firms are looking at deals, but others are waiting it out, looking to see if COVID-19 changes the types of bets they should be making.

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“It’s on pause right now,” said Moelis managing director Andrew Shore. “While everybody tells you they’re open for business, most boards will not let cash leave a company right now. That is fundamentally the right decision, but what companies ought to be doing now is getting their ducks in a row to pounce when the markets open.…They’ll have an opportunity to buy good companies. Some will be at distressed levels, some will not be at distressed levels, but all will be at lower valuations than where we were going into this.”

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On the distressed side, there are assets like Revlon, which hired Goldman Sachs to sell all or parts of the business in 2019. That process is said to be ongoing, though Revlon is currently negotiating a refinancing agreement that, should it close, would mean it doesn’t necessarily need the cash from selling assets anymore.

COVID-19’s business impact will likely mean more companies will find themselves in distress, sources have said.

But the beauty M&A that’s been popular over the past five years — L’Oréal paying $1.2 billion for It Cosmetics; the Estée Lauder Cos. Inc. paying $1.45 billion for Too Faced; Colgate paying 1.5 billion Euros for Filorga, or Shiseido paying $845 million for Drunk Elephant — is likely no more, at least in the short term.

“No banker with credibility will paint the picture of Elemis or Drunk Elephant exits. Those days are gone for the foreseeable future,” said Ilya Seglin, managing director at Threadstone LP.

Sources say valuations going forward are going to be lower, thanks to decreased competition. Charlotte Tilbury, working with Jefferies and Goldman Sachs, is a possible exception — valuation expectations there remain high, sources said, around the $1 billion mark. Pre-COVID-19, Lauder was said to have offered $1.1 billion, which was turned down as the business looked for $1.4 billion.

Other deals that were in the works already when COVID-19 took hold are said to have hit the pause button, and while many private equity firms have described themselves to bankers as “open for business,” unless they’ve already met with investment targets before COVID-19, it may be difficult to navigate through the diligence process, sources said. “It’s hard to do a Zoom deal if you’ve never met someone in person,” one financial source said.

That being said, “There’s a lot of money on the sidelines…there’s definitely a desire for private equity firms and growth equity firms to put money to work,” said Arash Farin, managing director at The Sage Group. “Strategics are going to take a break,” Farin added, but in private equity, “everyone we’ve spoken to has been open for business and looking for deals.” He estimated that when deal flow starts to come back, between 60 and 80 percent of beauty deals will be private equity focused.

But in the near term, it will be tough for firms to fully evaluate which brands they should bet on.

“Private equity fundamentally needs to see a business plan that has some basis in reality, and until things are fully up and running, it’s going to be hard to build a five-year plan if you’re dependent on brick and mortar distribution,” Seglin said.

Brands that remain relevant during the COVID-19 pandemic are likely to be able to raise capital, said Seglin, but at lower valuations. “If a brand is still relevant to the consumer and they just need capital, those brands are going to be able to raise money,” he said. “I don’t think it’s going to be at the valuations we saw before the crisis.”

General consensus is that companies that have strong digital operations, aren’t reliant on retail partners and have been able to prove community loyalty by maintaining sales through the pandemic are going to be of interest.

“The targets we think will continue to be of high interest, definitely for strategics and probably also for private equity firms, especially if they have existing platforms, will be ones that have built strong communities surrounding their brands, and also ones that are focusing on green, clean [and] natural as well,” said Janki Gandhi, managing director at Goldman Sachs.

While most deals are on hold for now, companies that need capital may want to raise it — even if it’s not at a high valuation, some sources suggested. “Cash is king in a time of uncertainty. If someone’s offering you a lot of money and the valuation isn’t bad…it should be a serious consideration,” said one financial source.

On the flip side, for buyers, now may be the time to browse.

“Competitively this would be a good time to buy. Across categories, people are seeing better valuations,” said Coye Nokes, partner at OC&C Strategy Consultants.  “You also want to think about what is the possible impact of an extended recessionary period. You have to look at this now and say which businesses are well positioned with a different market context, which is pretty guaranteed in 2020.”

For more from, see: 

Can Beauty E-commerce Sales Make Up for Coronavirus Store Closures?

Top 10 Largest Beauty Manufacturers

Revlon’s Refinancing Faces Uncertainty