LONDON — M&A activity in beauty and personal care is effervescent, with private equity players prepared to pay high multiples — and elbow-out trade buyers — and digitally native brands sitting pretty as they await investment, according to a new report from Alantra, the M&A advisory investment bank.
According to the report, which Alantra shared exclusively with WWD, 2018 got off to a strong start, with momentum building over the past six months. M&A activity in the global personal-care and beauty sector hit a new record in the second quarter, with 41 deals completed compared with 26 in the corresponding period last year.
Some 19 of those deals completed in the second quarter have involved trade buyers, while 22 were led by private equity and venture capital investors. The greatest activity in the second quarter was in color cosmetics, with 11 branded acquisitions taking place and the majority of brands headquartered in North America.
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In an interview, the report’s coauthors — Justine Mannering, managing director, and Matthew Wiseman, managing director and partner — said 2018 deal volumes are set to approach 2015 and 2016 levels again after a slight reduction last year.
The authors said the continued growth of social media-driven brands, product innovation and new channels to market have all been powering M&A frenzy in the sector.
The report also points to the growing power of private equity: In 2017, private equity transactions accounted for about 50 percent of total deals, and in 2018 that percentage will grow to record levels, according to Alantra. The report also points to the proportion of color-cosmetics deals, compared with skin-care and hair-care ones, which has also been growing since last year.
Mannering said she was struck by the amount of money private equity firms were prepared to pay for beauty and personal-care businesses: Last year, private equity paid three times annual sales compared with the global trade giants, which were prepared to pay four times the annual sales of their desired beauty brands. By comparison, international trade buyers paid out 2.3 times, and domestic trade buyers offered 1.5 times sales.
“This is one of very few sectors where you see private equity comfortably paying revenue multiples — and quite often beating out trade — particularly local or regional trade buyers, because they have so much confidence in the markets and the ability to grow these brands and exit them successfully,” said Mannering, who works across a variety of sectors, including apparel and accessories, luxury brands, retail and wellness and leisure.
“The only place where we really see (private equity) being beaten is with the big global trade players, the Estée Lauders and L’Oréals of the world.” She added that, looking ahead, “we think (the multiples trend for) private equity is going to be above that three-times figure.” Mannering also noted that from the brand’s point of view, “if you can attract global interest you can usually increase your valuation.”
During the interview, Wiseman said private equity finds beauty attractive for several reasons, including growth potential — and resilience. “Where other consumer sectors are being impacted a little bit by confidence and by uncertainty, the beauty industry hasn’t traditionally been impacted to the same extent as the others.”
He added that the big, international corporates are snapping up beauty brands for a whole other set of reasons.
Wiseman pointed out that the smaller brands are flexible, creative and nimble, while the big corporations “take time to move and change direction. They are also crying out for growth. They haven’t been able to achieve that through their traditional channels and routes of marketing. The smaller, younger companies that are growing at a rate that the big corporations can’t replicate, and so they are choosing to acquire them.”
Mannering added that big corporates are using influencers as a metric to measure a brand’s growth potential. “It’s become key and a good way of gauging how fast a brand is growing, how quickly they’re getting viewers, how many people are following them, how many people are buying through these social platforms, which are a key channel to market,” she said.
Wiseman said the trends underpinning M&A activity in the second quarter included demand for natural products, the global rise of K Beauty, and the popularity of color cosmetics.
He pointed to the acquisition of The Organic Pharmacy by the pharmacy-focused dermatologist company Istituto Ganassini and Unilever’s purchase of the Italian natural brand Equilibra.
“The latter is a good example of natural brands increasing in prominence in mass/masstige channels, a trend we expect to continue going forward,” he said.
Wiseman also noted that L’Oréal made its first acquisition of a K beauty brand in the quarter, taking on board the Millennial-focused Stylenanda. “This follows K Beauty acquisitions to date by Unilever of Carver, LVMH of Clio and Estée Lauder of Dr Jart. K Beauty products are now an established global phenomenon that have moved beyond a trend, largely due to their high quality, commitment to innovation and rigorous standards.”
In color cosmetics, investments included brands such as Anastasia Beverly Hills by TPG Capital, Milani Cosmetics by Gryphon Investors and Lime Crime by Tengram Capital Partners. “It is interesting to note that no global corporates were tempted by Anastasia Beverly Hills despite its obvious attraction, and it may be that, for now at least, their portfolios are complete,” Wiseman said.