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Natura Deal Would Be Good Fit for The Body Shop, Analysts Say

L’Oréal and Natura have entered exclusive negotiations over the Brazilian beauty firm’s $1.12 billion bid to buy The Body Shop.

PARIS — L’Oréal’s proposed deal to sell The Body Shop to Natura Cosmeticos solves problems for both beauty giants: The Paris-based firm gets rid of an underperforming subsidiary while the Brazilian group is able to further lessen its dependence on its struggling home market.

L’Oréal has entered into exclusive negotiations with Natura after the Brazilian company made a firm offer for The Body Shop that values the brand and retailer at 1 billion euros, or $1.12 billion, at current exchange rates.

“I am very pleased to announce Natura as the potential new ‘home’ for The Body Shop. It is the best new owner we could imagine to nurture the brand DNA around naturality and ethics,” L’Oréal chairman and chief executive officer Jean-Paul Agon said.

“Natura will support The Body Shop development in the long-term and enable The Body Shop to best serve its customers while respecting its strong commitments toward its employees, franchisees and stakeholders,” he added.

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Analysts reacted positively to the news. “The disposal is good news, in our view, given [The Body Shop’s] weaker top-line growth and profitability and differentiated activity to the L’Oréal group as a retailer,” wrote Raymond James research associate Marion Boucheron in a research note.

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“While the impact of the disposal of The Body Shop on [L’Oréal’s] numbers will be limited, it is a positive sentiment, given how long The Body Shop has been a drag on both organic top-line growth and operating profit,” said Deutsche Bank analyst Eva Quiroga.

The Body Shop saw organic sales growth of 0.6 percent and EBIT margin of 3.7 percent on average between 2013 and 2016, compared with 4.3 percent and 17.6 percent for L’Oréal as a whole, Boucheron said.

As such, analysts said they expected bids to be lower. Quiroga described the offer as “somewhat better than expected,” and reports circulating on the market earlier this week suggested the sale price was likely to be in the region of 800 million euros, or $899 million.

Investment firms CVC Capital Partners and Investindustrial, as well as Chinese conglomerate Fosun, were also reportedly among the bidders.

“While [the price] is just slightly above the purchase price in 2006 of 652 million pounds [or $1.14 billion at the time], we believe it is still a good price given the decline in profitability since,” said Boucheron. “It represents a 34 percent premium to our [discounted cash flow]–based valuation of The Body Shop of 745 million euros [$837 million].”

Strategically, the deal is also said to be a good match, with both Natura and The Body Shop sharing a focus on natural cosmetics and sustainability. “The prospect of Natura Cosméticos acquiring The Body Shop makes sense in the context of Natura’s existing portfolio and its shared values,” said Hannah Symons, a beauty and personal-care analyst at Euromonitor International.

“The Body Shop being a pioneer of ethical sourcing and social responsibility in the beauty and personal care industry makes it a perfect match for Natura’s green approach to production and plant-based heritage,” she added. “These shared values will help nurture the defining integrity of The Body Shop on an even greater global stage.”

Natura, Brazil’s largest home-grown beauty company, has also been endeavoring to decrease its focus on its domestic activity in recent years by growing its international presence. As part of this strategy, it purchased a majority stake in Australian brand Aesop in 2012, and bought out the remainder of the company last year.

“With this transaction, the Natura Group will have three powerful brands with a strong identity: Natura, Aesop and The Body Shop,” João Paulo Ferreira, ceo of Natura, said in a statement. “This move will further strengthen our strategic aims of becoming more international and more diversified in terms of brands and sales channels.”

In 2016, The Body Shop generated net sales of 921 million euros, or $1.02 billion, at average exchange for the period, according to L’Oréal. The brand is present in 60 countries and has more than 3,000 points of sale.

“Natura has so far been very focused on Brazil and Latin America,” Quiroga commented. “The Body Shop will further bolster its global expansion, making for an increasingly meaningful global competitor.”

Natura has also gained experience of retail thanks to its acquisition of Aesop, and has begun opening stand-alone stores under the Natura brand in order to decrease its dependence on direct sales, its core business.

“Upon purchasing Aesop in 2012, Natura has facilitated the sustained growth of the brand’s best-in-class, monobrand retail strategy,” observed Symons. “Building on this experience, Natura opened its first own physical store in São Paulo in 2016, a radical move considering that direct-selling has historically strongly underpinned the company’s DNA. This was a clear signal of a change in retail tack for the company, which is why the acquisition does not come as a surprise.”

The proposed transaction will be submitted to L’Oréal’s employee representative body and is subject to regulatory approval, notably in Brazil and the United States, L’Oréal said. It is expected to close before the end of this year. Natura said it has already approved financing sufficient for the totality of the purchase price on closing.

L’Oréal acquired the brand in 2006 for 652 million pounds, which at the time was worth $1.14 billion, to bolster its activity in the natural skin-care market. But the company has been a drag on its margins and growth, and has underperformed key competitors like Bath and Body Works, analysts said.

Natura was founded in 1969 in São Paulo by Luiz Seabra, who remains the company’s biggest shareholder.

Integrating The Body Shop into Natura would lead to a group with consolidated turnover of 11.5 billion Brazilian reals, or $3.5 billion at current exchange rates, 17,000 employees, 3,200 stores, a portfolio of more than 2,000 products and a sales force of 1.8 million independent sales representatives, Natura said.