LONDON — Hello, beauty.
Investors will be uttering the phrase more and more as 2018 rolls ahead and demand for beauty and wellness companies reaches new highs.
M&A activity in the beauty sector is effervescent, with private equity prepared to pay high multiples — and elbow out trade buyers — while digitally native brands with big social networks are sitting pretty as they await investment or an outright sale.
According to Alantra, an M&A advisory investment bank, the year got off to a strong start, and momentum has been building ever since, with record M&A activity in the global personal care and beauty sector. Some 41 deals were completed during the second quarter of 2018, compared with 26 in the corresponding period last year.
Powering the activity is the continued growth of new, social media-driven brands, product innovation and new channels to market. Enhancing the appeal of these brands is the fact that sales volumes and markups in beauty are high, making the returns rich.
Over the past year, private equity has been paying some of the highest multiples in beauty: three times annual sales, compared with global giants, which are prepared to pay four times sales. By comparison, international trade buyers have paid out 4.3 times, and domestic trade 1.5 times sales.
The serious investors are spotting companies earlier and often grabbing at opportunities as soon as they can.
The London-based entrepreneur Thea Green, who founded Nails Inc. in 1999 and who has since launched Inc.redible Cosmetics and My Mood, a new brand in partnership with Boots, said she recalls how hard it was to get investors’ attention when Nails, Inc., which is now turning over about 20 million pounds a year, was still young and growing.
“They used to say you weren’t big enough, but I don’t think it’s about sales and numbers anymore,” said Green. “Everyone wants this Millennial customer and brands that are social media-relevant. That’s where the market is trending, so if you’re a brand that was born in the social media age and you can prove you have a track record — although you’re only two years old — then that’s a lifetime.”
Asked about the overall appetite for M&A in the final quarter of 2018 and beyond, Ashish Burman, managing director at Financo in London, said the answer depends on the sector. He said beauty continues to be an area of high volume within M&A, both in the U.S. and Europe.
“The valuations continue to be pretty high because people realize those businesses have the ability to scale up very quickly,” said Burman, adding that he’s expecting to see more activity in the health and wellness sectors, too. “It’s where the consumer is spending more money. Ultimately, the investment money will follow where the consumer is spending. Beauty and health and wellness are the areas where the consumer is spending, particularly the Millennial customer.”
Then there is apparel, which is having a harder time for myriad reasons: The margins are not nearly as high as beauty, there’s a glut of merch on the market, and competition is fierce.
“I think, in general, the market for apparel is somewhat muted,” added Burman. “Processes in the apparel sector seem to be taking longer to complete because the appetite is not as strong as it once was. I’m not saying the apparel brands won’t be attractive — but the bar has just got higher.”
Deals in apparel and accessories have been going through, with JAB Luxury managing to sell off all three of its luxury businesses over the past year: Jimmy Choo went to Michael Kors Holdings; Belstaff to Jim Ratcliffe, the chemicals magnate and Britain’s richest man; and Bally to Shandong Ruyi, with the deal set to close later this month.
Acne, which is still part-owned by its Swedish founders, has been taking a while as potential investors have said the price is too high.
While much of the deal-making activity has been in beauty, a study from Deloitte published in July showed the fashion and luxury spaces still have potential.
The study of mergers and acquisitions trends found that private equity players and investors believe the fashion and luxury space will grow between 5 and 10 percent annually over the next three years.
The areas of digital luxury and cosmetics and fragrances are projected to outperform, while apparel, accessories, watches and jewelry are seen keeping up with the average growth level against an uncertain backdrop.
“There is a substantial amount of uncertainty mainly driven by a globalization slowdown, a rise of populism in developed nations and prominent geopolitical instabilities affecting the global scenario,” the Deloitte study said, describing the unstable environment as a “major challenge” for fashion.
But those fashion investors are nothing if not bold: Deloitte found that 89 percent of the private equity executives and investors surveyed planned to acquire at least one fashion or luxury company this year.
Seventy-three percent said apparel and accessories was still the most attractive sector for a deal, while 60 percent singled out cosmetics and fragrances and 19 percent pointed to watches and jewelry.
Private equity remains on the prowl, and is looking for still-small companies that have shown they can connect with customers in multiple markets. In June, sources said investor General Atlantic took a 45 percent stake in Sézane, the hot French contemporary brand founded by Morgane Sézalory five years ago.
Retailers and brands continue to look for investors and weigh up potential partners, too. Alexander Wang is among designers looking for money to reimagine his business, which is wholesale heavy. He has more direct-to-consumer aspirations. Sources said the designer is working with a banker, trying to raise money to open more stores and build its roughly $100 million business.
Retailers are also expected to continue looking for investments that can bring them some new expertise and ways to transform their operations. It’s an approach that companies like Nordstrom Inc., Under Armour Inc. and PVH Corp. have used in the past and that is now being employed at Macy’s Inc.
So far this year, Macy’s has acquired the experiential retail concept Story and named its founder, Rachel Shechtman, brand experience officer. It has also invested in B8ta, which rents small slices of retail space on a monthly basis.
The public markets, too, are welcoming new members.
Earlier this month, Farfetch filed for an initial public offering in the New York Stock Exchange that could value the company at up to $5 billion, according to analysts.
As it embarks on life as a public company, the luxury fashion platform foresees taking a large slice of the online luxury boom and will use the proceeds from the IPO to fund growth and spearhead further acquisitions.
According to the Renaissance Capital watch list, an IPO tracking firm, Farfetch — which has been involved in a flurry of deals this year with the likes of Burberry, Harvey Nichols, and the Chinese marketing platform CuriosityChina — has annual volume around $215 million.
Renaissance’s research also highlights two more fashion-related companies which are part of a robust backlog in an initial public offering pipeline that is expected to test the public markets in the second half.
The list includes fashion-related firms Meili and Revolve.
Meili is an online fashion retailer in China backed by Tencent. It has an estimated volume of $3 billion, while Revolve is an online fashion retailer with more than 500 women’s and men’s brands. Revolve’s estimated volume is $1 billion.
According to Renaissance, the U.S. IPO market is well positioned for an active quarter.
“An extended period of strong IPO returns and low market volatility has created a receptive environment for a wide variety of companies to come public,” the research firm said, noting that tech firms could “finally get their hoped-for valuations in public markets. That could cause a herd of unicorn IPOs in the back half of the year.”
Burman of Financo would agree: “If you’re a truly multichannel business that’s got an international story, then I still think there’s probably market appetite but, clearly, there are macro factors at play, there’s a lot of uncertainty around Brexit, although good assets will continue to trade.”