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The Thinking Behind Beauty’s Latest M&A Wave

With a limited number of targets on the market, strategics and private equity firms are rushing to snap up the most promising brands.
With a limited number of targets on the market, strategics and private equity firms are rushing to snap up the most promising brands.
With a limited number of targets on the market, strategics and private equity firms are rushing to snap up the most promising brands. (Shutterstock)

Less than a month into 2024, it’s already clear that a lot of brands are going to find new owners this year.

I write a piece like this almost every year, and usually there’s one key theme connecting all the deals: there was the run of $1 billion-plus price tags; the run of sub-$1 billion price tags; a makeup M&A boom, then one for skincare, then for fragrance, and so on.

In 2024, it’s about all of the above, and more.

With fewer huge targets, strategics – who can only grow through acquisitions – and private equity firms – which have an excess of capital to deploy – are going after the same select group of well-managed, mid-sized brands.

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Below, some thoughts on the upcoming year in beauty M&A.

Who’s Selling

The last year or so was heavy on blockbuster deals.

In late 2022, Estée Lauder announced it would pay $2.8 billion for the Tom Ford brand, parent of Tom Ford Beauty, one of the conglomerate’s most valuable properties. In June, Kering Beauté bought Creed for $3.8 billion, making L’Oréal’s $2.5 billion acquisition of Aesop two months earlier seem like a bargain. K18 and Parfums de Marly, a very expensive and very niche fragrance brand, were acquired for about $700 million each.

There may be some mega-deals this year too (if Rare Beauty sells, it will certainly command at least a $1 billion valuation), but expect more mid-sized M&A along the lines of Shiseido’s late December acquisition of Dr. Dennis Gross Skincare for a reported $450 million. Roc Skincare, the anti-aging brand that was just acquired by the investment firm Bridgepoint for a reported $500 million, and The Honey Pot, bought by Compass Diversified for $380 million, fit in this mold too.

Most of the brands on The Business of Beauty’s list of likely M&A targets fall in the mid-sized deal category, including Kosas, Merit, Summer Fridays and Makeup by Mario. They are brands with sales around $150 million (Makeup by Mario is a bit bigger, with estimated 2023 sales of $225 million).

Who’s Buying

If they do end up selling, those brands will follow in the footsteps of brands like Youth to the People, Tula and Ouai, which were scooped up by L’Oreal and P&G for between $300 million and $500 million each.

Well priced with reasonable multiples, a line like Youth to the People was a relatively inexpensive way for a legacy conglomerate like L’Oréal to buy a Gen-Z clientele.

Strategics have to grow via acquisition. Some do have venture arms, like Lauder, LVMH and Unilever, but none have made a serious play in terms of creating newness, whether through investment or internal development.

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In uncertain times, these companies are looking for safe bets that won’t require major investment to scale, and aren’t going to flame out as soon as they’re acquired. Strategics aren’t looking to take an unprofitable business that’s growing fast and dump it onto their balance sheet with a multi-year strategy of turning it around and making it profitable; they’re looking for brands that are instantly accretive.

While a Creed, Tom Ford or Aesop comes along from time to time, strategics can’t afford to wait for a mature asset to hit the market, however. They need to sift through the many, many small and mid-sized lines and find the few gems that are both fast growing and profitable, or headed in that direction. They have to act fast, too, before a competing conglomerate or private equity firm snaps them up. Does a strategic want to wait until Summer Fridays get to $150 million in revenue? Probably. But are they going to? Probably not.

There aren’t many Summer Fridays out there, however. Many of the businesses that have started to scale – $50 million to $100 million in net sales – took a counterintuitive strategy to where the market was at the time (a strong retail presence in lieu of a direct-to-consumer model), and thus, there are just fewer of them. Rhode and Jones Road, which are mostly direct to consumer brands, are outliers, having yet to ink major retail partnerships.

And with the market heating up now, private equity will be the first to react and try to mirror what strategics are doing. These shops have a lot of money that needs to be deployed, and they’re willing to do deals at compressed valuations. (Private equity and VC are lagging indicators of where strategics are. If strategics are buying at lower multiples, then PE has to buy at lower multiples, and then the venture community either doesn’t invest or tries to at lower multiples.)

“The PE funds are super interested in beauty and personal care, but they have not done, at scale, a lot of acquisitions. They have a lot of dry powder,” Alexandre Terseleer, a principle at Kearney, said. Deals, he explained, could centre on “one brand that’s very strong” – along with some its suppliers – or a house of brands where they can “consolidate players into a bigger machine they can better market down the road or IPO.”

Overall, though, M&A in 2024 will be largely led by businesses doing $50 to $100 million in net sales that are profitable and fit the thesis of a strategic. Unfortunately, there are just fewer businesses like that which means more competition for fewer assets. It will take another year or two, at least, for businesses to pivot their strategies to adhere to what the market is looking for. Except by that time, it’s going to be something else.

Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.

© 2024 The Business of Fashion. All rights reserved. For more information read our Terms & Conditions

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