The End of Mega- Deal Mania?
Now that most of the sizable indie beauty brands have been sold, the era of frothy $1 billion deals could be coming to a close.
If Drunk Elephant isn't selling for $1 billion, is anybody?
Probably not anytime soon.
Beauty industry sources have indicated that $ 1 billion deals — especially for indie brands — are going to be few and far between for the next few years. The current crop of indies lack scale, meaning that even if strategic buyers were interested, they wouldn't be paying high dollar amounts to take over those brands.
There are exceptions and some of the legacy assets in the market could fetch $1 billion plus, sources said, including Revlon Inc., possible divestitures from
Coty Inc., and Charlotte Tilbury, which industry sources said is exploring a sale process with billion-dollar expectations. There are also a handful of private equitybacked brands said to have landed billiondollar plus valuations from private equity investors, including Morphe, Pat McGrath, Huda Beauty and Anastasia Beverly
Hills, though none of those are said to be actively exploring a sale.
But for now, the high-dollar part of the indie beauty M&A market is mostly behind us, industry sources agree. The past few years have hosted a disproportionate number of deals over $1 billion: Johnson & Johnson paid $3.3 billion for Vogue International; L'Oréal bought It Cosmetics for $1.2 billion; the Estée Lauder Cos.
Inc. acquired Too Faced for $1.45 billion; Unilever purchased Carver Korea for
$2.7 billion, and Colgate paid 1.5 billion euros for Filorga.
“The deals that were done over the past five years collectively were like the greatest vintage, they were amazing assets that were of size and scale and profit,” said Andrew Shore, managing director at Moelis.
“It's not a long list to begin with, for companies that could command those prices,” said Colin Welch, managing director at TSG Consumer Partners.
“If there are fewer [ billion dollar] deals going forward…it's a lack of scale assets in the space that would command those types of prices.”
Historically, $1 billion-plus beauty acquisitions have not been the norm, and industry sources noted that unusually high valuations have pushed the industry to the billion-dollar point.
“If you look at the last 10 years how many businesses traded for north of $1 billion…it's a very small number, and it's all in the very recent past,” said Rich Gersten, partner at Tengram Capital. “The beauty industry is incredibly fragmented — brands don't get that large….The reason $200 million brands are trading for $1 billion is because multiples have gone crazy.”
If valuations stay at around five or six times sales, it's possible more billion-dollar deals will happen when certain indie brands become larger. But if they contract and normalize to about three times sales, a brand would have to get to about
$350 million in net sales before it would be sold for $1 billion.
Strategic buyers are still said to be actively evaluating companies that come to market — nearly all the big strategics were said to have at least looked at Drunk Elephant — but the rush to buy doesn't seem to be what it was in 2015 and 2016.
“For them, the bar is getting higher when businesses come across — is this a hot thing that's trending now, or is this a hot thing that is sustainable?” one industry source said.
“The traditional strategic playbook has been to buy companies for a few hundred million dollars and then grow them,” said Vennette Ho, managing director at Financo. “The recent rush of billion-dollar acquisitions has largely been a reflection of strategics looking to acquire capabilities or enter a new segment in a meaningful way.”
The middle market — acquisitions of companies that have between $50 million and $300 million in net sales
— has always been the heart of beauty industry M&A, Ho noted.
Over the past few years, many of the companies that fall into that range have already been sold. Unilever picked up Tatcha and Hourglass; Lauder has acquired Too Faced and Becca; L'Oréal has bought It Cosmetics, CeraVe and many other brands; Procter & Gamble has added First Aid Beauty and Native, and now, Shiseido has acquired Drunk Elephant for $845 million.
Lately, the deal market is centered on smaller brands raising small amounts of money. In the past few weeks, the Beauty Chef raised $10 million, and Ursa Major raised $5 million. Today, ZitSticka — which makes pimple patches that have dissolving micro darts meant to infuse ingredients into pimples — unveiled that it raised a $5 million Series A led by BFG Partners, with Interplay Ventures, Silas Ventures and Propeller Industries.
While five or 10 years ago there weren't firms willing to invest such small sums in beauty companies, today there are loads. But that doesn't mean all those investments are going to land massive valuations or wind up in strategic hands.
“It's harder to figure out which
[ brands] will be scalable and become big enough and which ones will stall…and which ones are nothing but a near-term trend. That's against the backdrop of strategics that are just more cautious,” one industry source said.
Sources indicated multiples for some companies — but not all — are likely to remain high.
“The multiples always reflect the growth potential of businesses, and when the near-term growth slows down, people evaluate and think the long-term growth will be slower,” said Ilya Seglin, managing director at Threadstone LP.
Beauty industry dynamics are part of the reason for likely valuation moderation, industry sources said. Growth is more challenging now than a few years ago for indie brands, and sales gains play a big factor in multiple determination. As one industry source put it: “[Top line growth] is what strategics are paying for, because profitability they can figure out.”
Industry sources said it's harder for indie brands to grow at the same rate with Sephora distribution now than it was a few years ago because of slower store traffic, and that competitor Ulta Beauty is asking brands to pay more than they used to support their business, affecting profitability. Macroeconomic factors, including protests in Hong Kong, are also negatively affecting the industry, as are digital dynamics — the Facebook advertising and Instagram buzz that propelled sales for so many indie brands a few years ago is much more expensive today.
Plus, there are simply more beauty brands today than there were before.
“A level of competition is pretty strong on the brand side, too, not just the investing side,” said Welch, who said competition is still strong between private equity firms in the beauty space. “It's harder and harder to find businesses that are truly differentiating themselves by doing something that hasn't been done before. It's harder to carve out white space as a result in the consumer mind, online or brick-and-mortar retail as a result of the innovation that's happened in the category to date.”
“It’s harder and harder to find businesses that are truly differentiating themselves by doing something that hasn’t been done before.”
COLIN WELCH, TSG CONSUMER PARTNERS