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WWD Yearbook #8: Beauty M&A: Capabilities, Wellness, Direct Selling and Anastasia

Beauty investors went after brands, direct sellers, manufacturing and wellness in 2018.

Another year, another slew of beauty deals.

The beauty M&A climate remained heated in 2018, with deals ranging from strategic acquisitions of technology — i.e., L’Oréal and ModiFace — to minority private equity deals, such as TPG’s investment in Anastasia Beverly Hills, to outright strategic brand purchases, like Procter & Gamble and First Aid Beauty. And while the pace of deals may have seemed a little slower — especially for brands versus capabilities — there were several notable trends within beauty M&A this year.

Beauty M&A in 2018: Capabilities, Wellness,
Anastasia of Beverly Hills 20 Years of Beautiful Brows.

First of all, there was the Anastasia deal. Rumors and gossip swirled behind the scenes of this one — it was big, it was wildly profitable, and it was finally up for grabs. Founder Anastasia Soare, who had previously publicly said she had no interest in selling the business, hired Imperial Capital in late 2017. That alone sent a shock wave through a few in the industry’s i-banking community, as Imperial isn’t known for its beauty transactions. The brand went out broadly, with most strategic buyers exiting the process fairly early on, and TPG gradually emerged as the winner, buying 38 percent of the business for what sources indicated was around $1.3 billion. The deal was a nearly 50-50 debt-equity split, with around $650 million in debt, sources said.

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Other notable transactions came from P&G, which re-entered the acquisition game in late 2017 with the purchase of Native, and solidified its intent with purchases of Snowberry in February and Castanea-backed First Aid Beauty in July.

Then there was the flurry of activity for direct-selling businesses, noted Ilya Seglin, managing director at Threadstone LP. “One of the most interesting trends to me was that direct-selling was back,” Seglin said. 

Mousse Partners invested in Beautycounter in January, Groupe Rocher agreed to buy Arbonne in February and TPG invested in Rodan & Fields in May. Back in 2017, Coty Inc. also did a direct-to-consumer deal, buying 60 percent of Younique.

“The relevance of direct-selling is greater than it’s ever been, and that’s why you’re seeing people put significant amounts of capital behind these businesses,” Seglin said.

There was also the solidification of TPG — a massive private equity firm — as a beauty player. The group had previously done beauty deals from TPG Growth, its growth fund, with E.L.F. Beauty and Beautycounter, but hadn’t secured any major investments from the bigger fund. That changed in 2018, when TPG inked deals for stakes in both Rodan & Fields, said to have about $1.5 billion in sales, and Anastasia Beverly Hills, which at the time of the deal was said to have $340 million in sales and $200 million in earnings before interest, taxes, depreciation and amortization.

Other deals have continued to build upon private equity-established platforms. Glansaol, the parent company of Julep, Clark’s Botanicals and Laura Geller that is backed by Warburg Pincus, is said to have hired a banker to consider strategic alternatives. But several other platforms are still in building mode. Space NK founder Nicky Kinnaird made another investment for her Ancora platform (backed by Winona Capital) in 2018 with Vapour Beauty. Astral Brands added Butter London to a portfolio that also includes Aloette, Cosmedix and Pür. Yellow Wood-backed Freeman’s added Paris Presents to its beauty offering. Industry sources said other firms are out there trying to potentially build platforms, including Ares with its 2017 Devacurl deal. Elsewhere in private equity, L Catterton invested in the Honest Co.

Nick Vlahos Jessica Alba Honest Co CEO
Jessica Alba and Nick Vlahos, Honest Co. ceo. Derek Wood/WWD

The Honest Co. transaction was a big one. The business, founded by Jessica Alba, had been out in the market for years, and at one point was said to be pursuing a dual track process for both a potential sale and initial public offering. The company had a $1.7 billion valuation on its head, though, and that is said to have caused some potential suitors to walk away. But this year, the better-for-you personal care, beauty and home products business secured a $200 million investment from L Catterton that is expected to help it expand globally and to fund continued product innovation.

As predicted, not all the deals in 2018 were for brands — many were for expertise.

“Capabilities was my word of the year,” said Vennette Ho, managing director at Financo. For 2018, she saw more players trying to scoop up capabilities — bringing things like technology to channel to social media skills in-house via acquisition. “P&G and First Aid Beauty was a capability acquisition,” Ho said (she handled that deal on behalf of First Aid Beauty). “It’s a capability in prestige skin care in the U.S. that [P&G] didn’t necessarily have.

“These are not just plug-ins anymore,” Ho said. “People are trying to evolve their businesses in meaningful ways.”

Perhaps the more impactful capability purchase of the year was L’Oréal’s acquisition of ModiFace, another deal that stirred up the beauty industry. The acquisition, inked in March, brought augmented reality and artificial intelligence capabilities inside the business as part of the French beauty giant’s “digital transformation,” said L’Oréal chief digital officer Lubomira Rochet when the deal was unveiled. “We see technology bringing so much innovation in the consumer-decision journey for beauty,” she said.

Beauty M&A in 2018: Capabilities, Wellness,
ModiFace Skin Assessment.

“As part of L’Oréal, pushing that technology forward is something we’re absolutely planning to do,” said ModiFace chief executive officer Parham Aarabi. “This is a great next step for the next iteration of our technology, improving our technology and bringing it to the consumer. Under L’Oréal, we can do that on a scale and in a way that will be quite groundbreaking.”

“They will keep their very strong and unique personality within L’Oréal,” Rochet said. “This is the first tech company that we’ve acquired so the integration will be light, in a way.”

L’Oréal has since unveiled plans to roll out ModiFace technology across its brands, including NYX, Maybelline, L’Oréal Paris, Lancôme, Giorgio Armani, Yves Saint Laurent and Shu Uemura.

The transaction certainly bolstered L’Oréal’s in-house tech capabilities, but the consequences reverberated through the rest of the beauty industry, causing many of its competitors to rethink existing and future partnerships with ModiFace, sources said.

Meanwhile, Shiseido, an early adopter of the tech acquisition (the firm bought MatchCo and Giaran in the past), acquired a different capability in 2018 — one from Olivo Labs, which develops second skin technology that can be used to reduce the appearance of under-eye bags temporarily, among other things. The group also made a minority investment in Violet Grey, giving it exposure to the beauty retail environment.

There was also Johnson & Johnson’s move to buy control of Japan’s Ci:z, a skin-care business that gives J&J a stronger foothold in Japan.

In 2018, strategics developed programs outside of M&A to grow their brand and capability portfolios. Unilever, for example, has started incubating its own brands like Love, Beauty Planet and Apothecare, while continuing to make acquisitions — like natural, direct-to-consumer deodorant brand Schmidts.

Brand-wise, there were even fewer assets of scale on the market for big companies to buy than the prior year. That trend is expected to continue into 2019, when the gap between any-old-brand and a true gem is expected to widen, sources noted. “There will be a greater dispersion between average properties and really good properties — the real jewels will stand out,” said Andrew Shore, managing director at Moelis.

For those gems, the multiples will stay high, experts have indicated.

Beauty M&A in 2018: Capabilities, Wellness,
Pat McGrath Labs x The Met’s range of color cosmetics. Courtesy Image

In 2018, that was the case, with brands like Pat McGrath Labs bringing in a $1 billion valuation on $60 million in retail sales with a minority investment from Eurazeo. That deal was Eurazeo’s second. The firm is one of several newcomers to the beauty space, and has since done deals for Nest (in 2017) and Pat McGrath.

After looking at many deals, Gryphon Partners made its way onto the beauty M&A scene with an investment in masstige makeup brand Milani.

There were also the deals that didn’t get done. Cover FX was seen out in the market, and sources said deal talks got to an advanced stage before fizzling out. There was also Cult Beauty, the e-tailer, which sources said went out to the market with a banker who has since been fired. Several brands are expected to remain in the market as 2019 begins, including Space NK, StriVectin, Elemis and Jane Iredale.

Inside the corporations themselves, some senior executives have been specifically tasked with M&A. This year, Carol Hamilton, who used to head L’Oréal Luxe USA, is now group president in charge of acquisitions.

“We want to buy complementary brands, we don’t want to fill a space that we’ve already filled,” Hamilton said at WWD’s first BeautyVest summit in November. “We’re looking for that not only as it relates to a product idea or a category idea but also new business models. The market is changing so quickly, the way the consumer shops, so that very often, a brand’s business model will attract me and the company more than the product itself — even though product will always be queen and has to reign supreme. But once you have that fantastic product, the business model can be extremely compelling to us.”

In addition to ModiFace, L’Oréal bought Logocos Naturkosmetik AG, the Société des Thermes de La Roche-Posay, the Valentino beauty license and Pulp Riot.

Shiseido also appointed chief financial officer of Shiseido Americas Ron Gee to be head of the global M&A team, looking at deals across all geographies and technologies, as well as technology.

Behind the scenes, a continued desire to invest in the manufacturing end of the beauty world exists. In November, Cornell Capital, HarbourVest Partners and other investors invested in KDC, and private equity-backed Vee Pak purchased Cosmetic Essence Innovations.

At a macro level, the world of beauty investors continues to widen, in line with the beauty world itself. The category today is much more than skin, hair and makeup, and has expanded to include all areas of wellness — candles, fitness, supplements, food and beverages included.

Wellness, too, has continued to attract investors. Bulletproof 360, which makes collagen bars and coffee, raised a $40 million round, and dance fitness studio AKT raised money from TPG Growth earlier this year.

That partnership has allowed AKT to expand to more than 25 fitness studios, said founder Anna Kaiser. “Wellness is happiness and feeling your best self whether it’s treatments, products, fitness — and investors want a piece of that multibillion-dollar pie,” Kaiser said. “They know that’s happening and they want to be the first to bring something cool and different to market.”

Looking forward to 2019, experts are expecting the deals to keep coming, but potentially at a slower pace than in prior years. Investors and buyers are more interested in buying skin-care and hair-care brands over makeup in most cases, sources said. It’s also likely that the crop of private equity investments over the past few years will start hitting the market next year.

“The next group of companies to come to market will be smaller than what we’ve seen, therefore some buyers will act, and some buyers will stay on the sidelines to see if these businesses get bigger first,” said Shore.