Vice-President – Henry Wareing
Analysts – Heison (Cheng Hei) Chan, Kester Low, Saumya Shah
Deal Overview
Acquirer : L'Oréal S.A. (EPA: OR)
Acquiree: Aēsop
Deal Size: $2.5 billion
Buy Side advisors: Centerview Partners (financial)
Sell Side Advisors: Morgan Stanley (financial) and Davis Polk & Wardwell (Legal)
Introduction
In its largest brand acquisition to date, L'Oréal is purchasing the Australian company Aēsop in a deal valued at $2.5 billion. The parent company of Aēsop, Brazilian company Natura & Co, which also owns The Body Shop and Avon, confirmed the sale on Monday (CNN Business, 2023). It places Aēsop, known for its high end skin and body care products, in the same category as companies like Maybelline and Garnier. The acquisition would surpass L'Oréal's $1.7 billion purchase of YSL Beauté in 2008 as the company's biggest brand acquisition to date, according to statistics from Dealogic. Natura & Co's CEO Fabio Barbosa said in a statement on Monday that the sale of Aēsop will enable it lower debt and focus on other development avenues. The agreement is anticipated to be finalised in the third quarter of 2023.
L'Oréal Overview
L'Oréal is a world-renowned leader in the beauty and cosmetics industry, with a rich history that spans over a century. The company was founded in 1909 by French chemist Eugène Schueller, who developed a hair dye formula that revolutionized the industry. Today, L'Oréal operates in more than 150 countries and has a presence in every continent, employing over 82,000 people worldwide.
The company's portfolio comprises over 35 international brands, each catering to a specific consumer need or market segment. L'Oréal's most prominent brands include L'Oréal Paris, Maybelline, Lancôme, Kiehl's, Garnier, and Redken, to name a few. These brands are sold through various channels, including department stores, drugstores, supermarkets, and e-commerce platforms.
L'Oréal has a strong focus on research and development, investing heavily in innovation and technology to develop cutting-edge products that deliver superior results. The company's research teams are spread across six major research centres worldwide, where they work on various aspects of beauty, including skin and hair care, colour cosmetics, and fragrances. L'Oréal's research and innovation efforts have resulted in several groundbreaking discoveries, including the development of anti-aging skin care products, hair colouring products, and advanced sun protection formulas.
In addition to its commitment to innovation, L'Oréal is also committed to sustainability and responsible business practices. The company has set ambitious sustainability targets, including a goal to reduce its carbon footprint by 50% by 2030 and to ensure that 100% of its products have a positive environmental or social impact. L'Oréal has also been recognized for its efforts in diversity and inclusion, with a commitment to ensuring that its workforce reflects the diversity of the communities it serves.
Aēsop Overview
Aēsop is a premium skincare and lifestyle brand that has become a household name for those who appreciate high-quality, plant-based ingredients and minimalist packaging design. The company was founded in Melbourne, Australia, in 1987 by hairdresser Dennis Paphitis, who had a strong desire to create a brand that offered a unique and innovative approach to skincare. Since then, Aēsop has expanded globally, with over 300 stores located in over 25 countries.
The brand offers a range of luxurious products that include skincare, haircare, body care, and fragrance, all of which are crafted with a meticulous attention to detail. Aēsop prides itself on using only the highest quality ingredients, including plant-based extracts, essential oils, and antioxidants, to deliver optimal results for each product. The brand also places a strong emphasis on sustainability, using only sustainable and ethical practices in its production processes.
Aēsop's unique store designs and thoughtful customer service have earned it a loyal following around the world. The brand's stores are designed to create a sensory and immersive experience for customers, with each store having its own distinctive design that is inspired by the local culture and history of the location. The staff at Aēsop are known for their exceptional customer service, offering personalized recommendations and advice on product use.
Industry Analysis
The global cosmetics and beauty industry is a thriving market that encompasses a broad range of products such as skincare, hair care, makeup, fragrances, and personal hygiene products. The industry is worth billions of dollars and is highly competitive, with major players including L’Oréal, Estée Lauder, Procter & Gamble, Unilever, and Shiseido dominating the market.
The industry is driven by evolving fashion trends, changing consumer preferences, and technological advancements. In recent years, there has been a significant shift towards natural and organic products as consumers become more health-conscious and environmentally aware. The growing demand for cruelty-free and vegan products has also impacted the industry, with many companies now offering products that are not tested on animals and are free from animal-derived ingredients.
Moreover, the rise of e-commerce has transformed the beauty industry, making it easier for consumers to shop for products online. The increase in online sales has led to the emergence of new players in the market, including digitally native brands that focus on direct-to-consumer sales. These companies leverage social media and other digital platforms to reach their target audience and build brand awareness.
However, the industry also faces several challenges. One of the main challenges is regulatory restrictions. In many countries, cosmetics and beauty products are subject to strict regulations that require manufacturers to comply with safety standards and labelling requirements. These regulations can be complex and costly to navigate, which can limit the entry of new players into the market.
Another challenge facing the industry is increasing competition. With the rise of e-commerce, the barrier to entry has been lowered, making it easier for new players to enter the market. This has led to an increase in competition, which has put pressure on established players to innovate and differentiate their products from their competitors.
Moreover, supply chain disruptions can also pose a threat to the industry's growth. The beauty industry relies on a complex global supply chain, with many ingredients sourced from different parts of the world. Disruptions to this supply chain, such as natural disasters or political instability, can lead to delays in product delivery and increased costs for manufacturers.
Despite these challenges, the global cosmetics and beauty industry is expected to continue to grow. The rising demand from emerging markets such as China, India, and Brazil is expected to fuel growth in the industry. Moreover, the increasing trend towards self-care and wellness is expected to drive demand for natural and organic products. The industry's continued growth is also supported by the rise of e-commerce and the growing popularity of direct-to-consumer sales.
Financial Analysis
Comparable Company Analysis:
• Estee Lauder took a majority stake in Deciem at a $2.2B valuation in 2021.
• Unilever acquired Paula’s Choice for $2B in 2021.
• Shiseido purchased Drunk Elephant for $845M in 2019.
• L’Oréal acquired CeraVe for $1.3B in 2017.
• L’Oréal acquired IT Cosmetics for $1.2B in 2016.
Aēsop is L’Oréal’s largest acquisition to date and is 23x Aēsop’s past valuation of $110M in 2012 when bought by Natura & Co. Whilst, premium beauty players may be overvalued, there are significant synergies involved that could make a case for Aēsop’s acquisition. When considering how recent comparable transactions are of similar prices, this perhaps suggests that L’Oréal did pay a fair price for the acquisition.
L’Oréal and Aēsop’s financial metrics:
L’Oréal EV: $262.1bn
L’Oréal LTM Revenue: $38.3bn
L’Oréal LTM EBITDA: $8.3bn
L’Oréal LTM EV/Revenue : 6.9x
L’Oréal LTM EV/EBITDA : 31.6x
L’Oréal Gross Margin: 72%
Aēsop LTM Revenue: $537mn
Aēsop Gross Margin: 87.1%
Aēsop’s revenue growth compared to Natura & Co’s overall: 21% vs 0.4% (2022)
Considering the revenue growth of 21% in 2022, which is more than double of its close competitors in the premium beauty and cosmetic products market, as well as the higher margins than L’Oréal itself, Aēsop’s valuation and price is justifiable.
Precedent Transactions
Church and Dwight Co Acquired Hero Mighty Patch Brand and Other Products
Church and Dwight Co, a personal care products manufacturing giant acquired Hero Cosmetics Mighty Patch Brand and other products (A top Acne-focused skincare brand) for $630 Million in September 2022. Hero Cosmetics realised a monumental rise since its launch a few years ago, making it a beneficial acquisition for Church and Dwight Co. This transaction is expected to increase sales from 2% to 4%. It is also expected to increase the EPS to $2.97 per share (considering diluted EPS of $0.05). This year, Hero’s sales are expected to grow by 15%. The EBITDA for Hero in the trailing twelve months was $45 Million, and the price paid is therefore approximately 14 times.
Estee Lauder Acquired DECIEM
Estee Lauder acquired DECIEM, a Canadian multi-brand skincare company in 2021 for $1.1 Billion. In 2021, it owned 76% of DECIEM. It will completely acquire DECIEM through a 3-year period ending in 2024. DECIEM net sales were around $460 Million in the past 12 months ending 31 January 2021.
Shesiedos America Corporations bought Drunk Elephant Holdings
In October 2019, Shiseido Americas Corporation bought Drunk Elephant Holdings for a price of $845 million from VMG Partners. Drunk Elephant's net sales the previous year were around $75 Million, reflecting 11 times the price paid to acquire it. Being a fast-growing, prestigious ‘clean beauty’ brand, this acquisition has been a success. The acquisition has helped Shiseido to strengthen its skincare portfolio and thereby improve its performance in the Americas. Historically, Drunk Elephant’s EBITDA Margin has been 20-30%, and according to Shiseido, it will have a positive impact on their P&L.
Deal Rationale:
Cost Synergies
This deal is expected to unlock cost synergies for both L’Oréal and Aēsop. L’Oréal, as the world’s largest cosmetics and beauty company with a brand value of $38.3 billion (Statista, 2023) and a market capitalization of €224 billion (Vogue Business, 2023) has enormous manufacturing power and benefits from huge economies of scale due to the high level of goods it produces. Because of this, Aēsop will benefit massively, as it will have access to larger facilities within which to produce its goods, and therefore the marginal cost of its production should drop, which will boost its gross margin.
Aēsop already has very healthy gross margins, due to the high price of its goods, as it targets the luxury end of cosmetic and beauty products. For example, on one of its £30 bottles of 500ml soaps, it boasts an extremely high margin of 87.1% (FT, 2023). This margin could be improved upon even further after this deal unlocks new cost synergies for Aēsop, which would boost Aēsop’s profitability even more and turn it into a cosmetics goods powerhouse in the years to come. Furthermore, this profitability may be boosted by the fact that Aēsop targets high-income, luxury consumers that respond inelastically to cyclical downturns and recessions. This means that, while costs are being cut and margins boosted, Aēsop’s revenues will likely remain high, further boosting the profitability of its business.
Further possible cost synergies come from more generic M&A possibilities, as Aēsop and L’Oréal may combine certain teams and make job cuts to further boost its cost synergy potential. This stems from the fact that these two companies operate in similar markets, and therefore there will likely be overlapping expertise after the deal is concluded. Because of this, job cuts may be possible as the two companies streamline operations and merge teams together in order to boost profitability.
Revenue Synergies
Despite there being some cost synergies available in this deal, the vast majority of deal rationale comes from the huge amount of revenue synergies possible due to this deal. The first of these is the increased geographical coverage that this deal will allow. Aēsop, with its gender-neutral and premium products which attract a broad age range, is set to be a major player in the Chinese luxury cosmetics market in the coming years. Nicolas Hieronimus, the CEO of L’Oréal Groupe, reinforced this idea, as he stated that “L’Oréal will contribute to unleash its massive growth potential, notably in China,” (L’Oréal, 2023). This revenue synergy is particularly important to the deal, as the Chinese luxury cosmetics market is huge, and therefore this possible revenue synergy represents a big opportunity for both L’Oréal and Aēsop to profit from.
Furthermore, the possibility of penetrating the Chinese market is particularly exciting here as L’Oréal already has a large presence in China, which it has cultivated since its expansion into this region in the 1990s. Therefore, L’Oréal should have the expertise and connections to ensure a smooth and effective rollout of the brand in China. Bruno Monteyne, an analyst at Alliance Bernstein, reinforced this sentiment as he stated that Aēsop “has material expansion potential,” within China (FT, 2023).
Another possible revenue synergy here comes from the possibility of expansion into the Travel market after this deal. The Travel market is highly lucrative, and therefore this is another powerful revenue synergy that could be harnessed effectively to boost revenues and profits after this deal. For example, after this deal, L’Oréal could use its extensive contacts and networks within the industry to ensure that Aēsop products are stocked in premium airline seats and toilets under contracted brand deals. The advantage of this is that it would ensure steady revenues due to the contractual nature of this revenue synergy, whilst also tapping into a huge market of wealthy holidaymakers as they are introduced to the brand on their travels.
These two revenue synergies represent huge opportunities for both brands under this deal, as they could be used to effectively boost revenues and therefore contribute to the long-term success of this deal, and reinforce L’Oréal’s long-standing track record of meaningful and effective M&A.
Further Rationale
Under this deal, L’Oréal has high hopes for the future growth of Aēsop, as it hopes that it will join L’Oréal Luxe’s ‘Billionaire brands club,’ which would mean doubling Aēsop’s sales in the future. L’Oréal plans on inducing this growth by utilizing Aēsop’s cult following among wealthy millennials to capture a high market share in the luxury cosmetics market, and therefore boost revenues. However, a high risk here is that Aēsop’s possible success could detract from other L’Oréal brands, in particular, Kiehl’s. Pierre Tegnér, equity analyst at financial services group ODDO BHF, has summarised this risk as he writes that “L’Oréal will have to make sure that Aēsop complements the portfolio and doesn’t cannibalise its apothecary Kiehl’s brand, in terms of product and image.” (Vogue Business, 2023). Therefore, L’Oréal must move cautiously in its ambitious growth rationale behind this deal, to ensure that Aēsop’s growth does not negatively affect other L’Oréal owned brands, and therefore possibly detract from the group overall.
Overall, the deal rationale behind this deal is similar to previous L’Oréal M&A activity, which is to incorporate brands under the L’Oréal umbrella, and then effectively scale them up using L’Oréal’s extensive expertise in the industry to become a global powerhouse and in turn boost L’Oréal’s revenues overall. This will be done by tapping into the extensive cost and revenue synergies available in this deal to grow Aēsop to a global brand which will be a valuable acquisition in L’Oréal’s extensive portfolio.
Risks
One of the key risks associated with the acquisition includes maintaining Aēsop’s unique brand identity and culture, managing the growth of the brand, and navigating cultural differences between Aēsop and L’Oréal. A careful balance between retaining Aēsop’s identity and integrating Aēsop into L’Oréal’s overall business strategy must be sought. Aēsop’s unique brand identity and culture, such as its minimalistic design aesthetics and creative risks, have been touted as the key selling points of the brand – as emphasised by Aēsop CEO Michael O’Keeffe after the deal’s announcement. Furthermore, Aēsop’s niche customer segment may also mean additional costs and less synergies in terms of product innovation, marketing, and distribution due to the varying positioning and customer bases. As L’Oréal’s CEO Nicolas Hieronimus mentioned, Aēsop is the “epitome of avant-garde beauty” (L'Oreal Groupe, 2023), which may clash with the distribution and marketing methods employed by L’Oréal’s more affordable brands such as Garnier. Moving forward, O’Keeffe has hinted that Aēsop would still be considered as ‘outsiders’ despite being part of L’Oréal, the world’s largest beauty group.
The inclusion of Aēsop into L’Oréal’s luxury division, alongside brands such as Lancôme and Kiehl’s, could also mean divided attention between the brands. Considering that much energy would be spent focussing on Aēsop’s integration into the portfolio for the time being, incumbents like Kiehl’s may risk stagnation. There could also be the risk that as Aēsop continues to grow, it may reduce the market share and weight of brands such as Kiehl’s within the portfolio – particularly since they have similar consumer bases and apothecary-like product qualities.
The acquisition also presents an opportunity for L’Oréal to expand its presence in the Chinese luxury beauty market through leveraging Aēsop. However, this strategy may face risks due to changing consumer preferences and high competition from local players such as Pechoin. Local brands have a better understanding of domestic trends, such as the infusion of local traditional medicinal herbs in the products’ formulations and may have an advantage in product innovation that could pose a risk to L’Oréal’s intended expansion strategy. Hence, L’Oréal and Aēsop must continuously ensure that their product innovation does not fall behind such local brands to continue driving growth into key markets.
Nonetheless, L’Oréal’s acquisition of Aēsop still represents a highly strategic move in diversifying its portfolio of beauty brands and strengthens its presence in the premium skincare segment. As long as there is careful management and mitigation of risks during the integration process through respecting Aēsop’s current brand identity and culture, there would be great opportunities in leveraging Aēsop’s strengths to generate synergies.
Conclusion
To conclude, this deal between L’Oréal and Aēsop represents an excellent opportunity for both parties to benefit, both personally and as a single entity. For Aēsop, this deal confirms their success as a brand and offers the opportunity for them to expand into new markets and produce new products under L’Oréal’s roof. For L’Oréal, this deal builds upon their strong tradition of meaningful, effective M&A activity which contributes to their long-term strength as a brand in the beauty industry.
As for possible pitfalls, these would come from Aēsop being so successful under L’Oréal’s roof that it starts to detract from other L’Oréal brands, which would be problematic as this would possibly detract from L’Oréal’s overall profit levels. However, if this risk is managed effectively by L’Oréal, and it should (L’Oréal has years of experience with these sorts of deals), then internal risks should be minimal and therefore, this deal should be a success which will provide both stakeholder and shareholder gains for the foreseeable future.
References
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The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.