Who Will Snap Up Beauty Assets on the Block?
As beauty strategics look to trim the fat in an ever-tightening market, the brand ownership model is shifting once again.
While strategics selling off assets is nothing new, the fact that an unusually high number are on the block, combined with the rumored tranche of brands expected to come to market in the coming year, opens the door for other players to increase their participation in beauty — namely private equity.
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As a refresher, Unilever said in late October that it is preparing to focus on the top 30 high-growth brands in its portfolio — in beauty that includes Dove, Dermalogica, Paula’s Choice and Pond’s — as part of an action plan unveiled by the company’s new chief executive officer, Hein Schumacher.
Divestitures are most likely in the offing, including the Elida Beauty business, with brands such as Impulse, Caress, Tigi, Timotei and Monsavon, although Unilever declined to comment on that possibility.
Rumors are rife, too, that Kao Group might sell some beauty holdings. Its cosmetics business is undergoing a reorganization and has already completely consolidated 18 brands and is considering consolidating the remaining 12.
“We are currently not considering any sales,” a company spokesperson said. “Kao Group is discussing brand consolidation on an individual basis.”
There’s also speculation over whether the Estée Lauder Cos. will sell or shutter any brands as troubles in its China business persist, combined with the potential risks of further business disruptions in Israel and other parts of the Middle East.
Last week, the company slashed its full-year forecasts and laid out a road map for a 2025 and 2026 profit-recovery plan, through which it expects to drive $800 million to $1 billion of incremental operating profit. The plans include making changes to its innovation pipeline and product offering, among other areas.
If anything has to go, industry sources believe it may be one of the California brands — Smashbox, Too Faced or Glamglow. They have all initiated layoffs in the past year as those businesses face challenges, while international operations have also been scaled back for some.
A spokesperson for Lauder did not respond to a request for comment on plans for its portfolio.
And that’s not all. Industry sources say there are persistent rumors that Shiseido is considering the sale of its fragrance division, with brands including Issey Miyake, Narciso Rodriguez and Serge Lutens, as the group prioritizes global dominance in the skin health and wellness categories.
Sanofi, meanwhile, intends to spin off its Consumer Healthcare Business in the fourth quarter of 2024, at the earliest, to focus on its Biopharma business.
The list goes on.
For many of these listed companies, there is increasing pressure from financial markets. Therefore, they need to overdeliver and focus on core assets in their portfolio, and possibly divest noncore or underperforming assets.
“Even if you’re performing very well, when the economic context and market is a bit tougher, people are under pressure from the market to deliver and to focus on the right brands,” said Alban Gérard, a partner at Experienced Capital. “That’s cyclical, and we see it in a lot of industries.”
For beauty, it seems to be in overdrive.
“There have always been periods of time where strategics had divested a brand or two, but right now, you’re basically seeing a whole host of the core strategic buyers divesting brands,” said Lauren Antion, co-head of the beauty, personal care and wellness practice at Intrepid Investment Bankers, of the trend.
“Across the board, we’re seeing a much more selective approach to M&A from a lot of the strategic buyers, and they’ve all just become much more narrowly focused on areas where they feel like they can drive the most value,” she said.
Another part of the reason is that these big strategics have gone on an unprecedented spending spree over the past decade and are having to refine their strategies for what is working for them — and what isn’t.
“It’s a normal arbitrage of your resources. You reallocate, refocus on the right brands,” said Laurent Droin, head of Europe, the Middle East and Africa at Eurazeo Brands.
“They are focusing on what they see as most promising,” agreed Ariel Ohana, a cofounder and principal at boutique investment firm Ohana & Co. “Another way of putting it is that they’re really trying to follow the consumer — or more precisely, where they see the high LTV [or lifetime value consumer].”
In the case of Unilever, on the same day it presented its strategy, the group said it has sold a majority, 65 percent stake in Dollar Shave Club to Nexus Capital Management LP, a U.S.-based private equity firm. That sent shockwaves through the industry.
Unilever’s purchase of the brand in 2016 was a flagship acquisition of a direct-to-consumer asset, considered a brilliant move by industry experts at the time. It not only gave Unilever entry into the razor category, but also access to Dollar Shave Club’s preexisting, broad-range online consumer base.
“The news from Unilever and Dollar Shave Club is amazing, because it really shows the fact they struggled to grow the brand to the right level, and they think they’re not the right backer now,” said one industry expert.
For strategics’ exits, there are three main options to consider: sell, spin off or shutter altogether.
“The most frequently used is to sell. There is another one, which is to split — it’s what J&J [Johnson & Johnson] did with Kenvue,” said Ohana. “And then there’s a third option, which L’Oréal has done a few times and Kao has done recently, which is to just shut down brands.”
A recent Kearney report found that 89 percent of surveyed respondents believe the beauty and personal care M&A volume is set to increase over the next two years.
“We expect to see more large ($1 billion-plus) deals and significantly more small (less than $100 million) deals,” the study said. “The only anticipated decrease will be in medium-sized transactions. A driver especially for the smaller transactions is that investors are looking to make acquisitions or investments earlier in the lifecycles of brands or pick up a minority share.”
If that thesis holds true, and early-stage investing is gaining popularity, who are the likely purchasers for the underperforming assets that strategics are looking to shed? Industry experts unanimously agree there’s a “massive opportunity” for private equity players today.
Not only has valuation gone down, “most PEs would prefer the company that’s doing 500 million [euros] and growing at a steady rate of, say, 5 to 10 percent,” than one with very fast growth rates, “as long as the brand has a history of profitability over a long period of time,” continued Ohana.
Typically, in that case, management is incentivized as shareholders and become entrepreneurs.
Industry sources say strategics often hold on to underperforming assets longer than they should, then tend to spin them off — sometimes simultaneously. For them at that point, it’s less about finding the right valuation and more about sealing the deal.
Now is the moment for PE players, especially those focusing on “special situations,” including restructuring.
“It’s much more work, but also comes generally with a very decent or low valuation — and therefore with great potential in terms of returns for private equity players if they succeed,” said Gérard.
Droin believes there will be two types of suitors. Most will be value-seekers, focused on restructuring troubled assets and the other being specialized beauty players.
Some PE players have made major moves already.
In late October, Natura & Co. said in a corporate filing that it had entered into an exclusive agreement with Aurelius Investment Advisory Ltd. for the potential sale of The Body Shop.
L’Oréal earlier that month said it had exited its investment in Sanoflore, the green beauty brand it had purchased in 2006. Sanoflore was sold to French investment fund Ekkio Capital and Sergio Calandri, Sanoflore’s new CEO.
And Orveon, the Advent-backed private equity firm, is actively looking for two skin care brands, after its purchase of BareMinerals, Laura Mercier and Buxom in a $700 million deal with Shiseido that closed in 2021.
“What I find super interesting in beauty is the strategics are totally reshaping their portfolio in beauty,” said Pascal Houdayer, CEO of Orveon, adding he was particularly surprised L’Oréal is ceasing to commercialize Decléor. “But you’ll see the strategics making tough choices.”
L’Oréal in mid-October said it would be winding down operations of the botanical-based skin care brand, Decléor, which the company acquired in 2014.
However, other industry experts looked at the Decléor move more as a “housecleaning” endeavor, the shuttering of a small brand in the same vein as Becca’s closure by Lauder in September 2021. L’Oréal also shut down and liquidated inventory of Clarisonic in 2020.
Houdayer now has a vision to create a collective of five brands. “We are seeing actually in Q4 an acceleration of talks. It was a gloomy moment to try to buy brands in 2023,” he said. “We are in our forward processes with a couple of brands and some of them are to close their process by the end of Q1 2024.”
As for if private equity can jump-start growth when strategics — with all their resources — cannot, Houdayer believes the answer is “yes.”
“What we have done in the carve-out from Shiseido of these three makeup brands is a perfect example,” he said. “It’s not that the strategics are not good, but the strategics have so many brands in their portfolio that they spread themselves too thin in terms of innovation, in terms of talent, in terms of investment.”
As large companies look to diverst noncore assets, entrepreneurs might be takers, too. “They are more at ease with restructuring and can operate at lower cost,” said Joël Palix, founder of boutique consultancy Palix Unlimited. “What we have seen in other industries also are groups from emerging markets looking at some of these assets.”
That’s particularly possible for mass market assets.
Further, there are personal financial holding companies that are run like private equities, such as Impala, which has in the past acquired brands such as Roger & Gallet.
“The portfolios of brand will go either to PEs or to smaller groups looking for scale,” said Ohana. “Another category that could be potential buyers are [smaller] strategics that are more mass.”
Take E.l.f. Beauty’s recent acquisition of skin care brand Naturium, with chairman and CEO Tarang Amin stating that he is on the lookout for more brands to add to his arsenal, although it has a high level.
“We’re definitely open. We have a pretty high bar, though,” said Amin. “Just given the strong organic growth we naturally have, we have to have a lot of confidence. It has to be a really special business like Naturium was. Naturium was growing at 80 percent CAGR [compound annual growth rate] the last two years. It was also profitable. If we see another Naturium, we would snatch it up.”
Then there’s CPG companies like Church and Dwight, which acquired Hero Cosmetics for $630 million in 2022 and is understood to still be building its beauty portfolio. Another industry source cited Haleon, whose health care portfolio includes oral care and ingestibles like Sensodyne and Centrum, as another potential buyer.
“I think they’re going to be interested in a certain segment of the beauty industry, so they won’t be buying color assets, but I think they’ll be very active in the skin care assets,” the source said.
Antion believes that ultimately it will depend on the brand and the type of sale, using Unilever’s Elida division as an example.
“It’s just so many different brands. It’s going to be hard for that to fit into another strategic platform and home, particularly as all the other strategics focus more narrowly on what they’re good at,” she said.
“They put that business unit on the market a couple of years ago, pulled it off, didn’t get the valuation they wanted, and recently re-announced that they’ve hired a banker to sell it,” continued Antion. “The biggest change has been putting the infrastructure in place to have that be a stand-alone unit, so that private equity felt more comfortable buying the business.”
Once a private equity firm turns an asset around, it might be sold back to another strategic.
Gérard explained that if an asset is grown over four to five years into a 50 million euro to 60 million euro business, with the right team structure and positioning, it could be of interest to a big group — private equity or strategic — which could then accelerate the activity to a 300 million euro to 400 million euro activity.
Launching an IPO is a possibility, too. “When the markets are hot and the brand is big enough, that could be an option,” said Gérard.
But as beauty companies contemplate a move to Wall Street, there also plenty of cautionary tales, most recently the Advent-backed Olaplex. The hair care brand, once the category’s darling, culminating in a 2021 initial public offering, saw sales slide 30 percent in the three months ended Sept. 30.
Whatever route is taken, one thing seems certain as beauty heads into the 2024: Portfolios are evolving as strategics prioritize strong performers during times of economic uncertainty.
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