Despite COVID-19, Beauty M&A Is Booming

2020-11-20 mediabest Beauty & Balance

Things may have gotten weird in the beauty dealscape over the past few months as financial types found themselves Zooming through due diligence, but the ongoing pandemic is not expected to put a stop to beauty M&A going forward.

Shifts in consumer trends toward online shopping, skin care, hair care and self care will have major impacts on what buyers and investors are looking for going forward, experts said.

“Any time there’s change in the market and change in consumer behavior, it drives M&A. These are not temporary shifts, they are permanent shifts,” said Vennette Ho, managing director at Financo.

Bankers are busy, insiders said, and are expecting a variety of companies to hit the market in the coming months. Low interest rates are expected to contribute to deal volume, sources said.

“There are a lot of transactions on the market. I don’t see any change on that, and there are probably even more volumes,” said Laurent Droin, managing director of Eurazeo Brands in Paris. “Transactions are taking more time, apart from certain exceptions. Everyone’s looking for smaller companies because there is still a scarcity of good assets, so everybody’s trying to get into future champions as soon as they can.”

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He added the rush is also on since beauty companies command such great margins and cash flow, therefore often they don’t need a second round of financing.

There are a handful of men’s brands in the market, as well as businesses coming back up for sale after pressing pause on processes due to the coronavirus. Bankers say they are busy having conversations with founders looking to take risk off the table, and that there is still selective deal appetite from strategic buyers.

“The markets have come back — no one is afraid to go out in the market, there’s no need to put a process on hold,” said Arash Farin, managing director at the Sage Group LLC.

But things are different than before, and investors looking at growing companies continue to inquire about “the COVID-19 bump” — the spike in sales, especially online, that many companies saw this year — sources said.

Beauty brands looking to do deals should be prepared to walk investors through COVID-19-era numbers, whether they went up or down, experts agreed. Brands that saw a big uptick because of exposure to online or categories that saw heightened consumer interest during the pandemic will need to explain the sustainability of those figures. Similarly, brands who saw slumps due to overexposure to brick-and-mortar retail or diminishing categories, like makeup, would need to show how they’re charting a path to recovery.

“People want to have these COVID-19 conversations in the rearview mirror and say, ‘This is our new normal, this is not a two month bump.’ What is sustainable is what the private equity [firms] want to know,” said Ilya Seglin, managing director at Threadstone Advisors.

COVID-19’s effect on beauty sales is one of the things that earlier this year, caused many companies to pause their deal processes.

But some of those companies have come back out into the market, and others are expected to re-initiate M&A conversations in 2021.

“There have definitely been a number of transactions that would have potentially gone to market in 2020 and many of them, regardless of whether they’re doing extremely well, just doing OK, or not well, got to the point where they wanted to have 2020 under their belt. Especially with the impact of COVID-19, people didn’t want to have the questions around, is this a COVID-19 bump or slump?” said Janki Gandhi, managing director at Goldman Sachs.

While company sales might have seen fluctuations because of the pandemic, valuations for beauty companies have not, sources said. “It’s like COVID-19 never happened; valuations are back up for anybody who did well throughout COVID-19,” Seglin said.

Valuations can be sky high in beauty, but those types of dreamy multiples are only available to companies that meet a certain set of standards, and those standards are changing. Investors and buyers want companies with a strong digital presence — but today, when they say that, they mean strong e-commerce sales versus a few years ago, when they meant a strong social media operation. Skin, hair and wellness are all expected to remain hot categories, following consumer shopping habits. Men’s may finally become a thing, based on the volume of men’s brands in the market. And manufacturing M&A, a busy sector for private equity firms not interesting in taking single-brand risk, is expected to continue.

“We find it interesting that some of the less sexy areas of home and personal care, like soap, personal cleansing, household products have had record sales. Consumers are really focused on their personal health and hygiene,” added Kelly McPhilliamy, managing director at Harris Williams.

“We’re going to continue seeing interest for skin care as a strong category, in particular in regards to natural skin care as well as dermocosmetics in both prestige in mass channels. We’re going to see continued interest in hair care as the category continues to outperform the other categories,” said Luc-Henry Rousselle, managing director at William Hood & Co.

“This year, it’s all about how brands pivoted,” McPhilliamy said. “Brands really found their footing by focusing on digital marketing and direct-to-consumer, third party and e-comm…as well as emphasizing solutions around what consumers are looking for.” McPhilliamy ticked off DIY beauty, self care, personal health and hygiene as key categories. “Not to mention brands really took a stand and have been showing they care and they’re taking action to address some of the social issues facing the nation. That matters to consumers today more than ever,” she added.

Diversity is expected to become more important to prospective investors, some sources said.

“Diversity both in terms of your employee base as well as your customer demographic has become increasingly important. Being able to show that your brand is truly inclusive and you do address a range of demographics — partners are going to be focused on that, especially with the current times,” Gandhi said.

In many cases, the companies that are desirable today are the same firms that attracted interest prior to the crisis. “There’s a whole cast of companies that were doing great going into COVID-19 because they had characteristics that were going to make them successful outside of retailers…great digital content, great community, almost a lifestyle following,” said Shaun Westfall, managing director at Jefferies.

Technology is another big area of focus. “Communities and block chains are very important today,” said Karine Ohana, a co-managing partner at Ohana & Co., referring to how the technology can help augment companies’ digital operations, traceability and sustainability functions in today’s world where consumer trust is key. She added investors are seeking companies with market-changing business models.

“I wouldn’t be surprised to see companies step up investments in areas like L’Oréal has done with ModiFace,” said Eva Quiroga, managing director at Bank of America, referring to the tech company focused on artificial intelligence and augmented reality. “Bringing technology in-house is probably easier with an acquisition than building it yourself. The beauty of the ModiFace relationship is that it’s so ingrained in the L’Oréal model at this point.”

Those are the types of companies that people are interested in, sources noted.

Strategic buyers, struggling with exposure to brick-and-mortar sales at a time of dwindling in-real-life shopping, will need to look to buy brands that are growing, and are likely to consider divesting brands that are not. Shiseido, Unilever and Henkel, have publicly talked of divestitures. Reckitt Benckiser is reported to be selling a portfolio of personal-care brands including Clearasil, Veet, Scholl and E45 skin cream, which could command up to 1 billion pounds, according to Reuters. Revlon has been considering divestitures for more than a year. And industry sources said that the Estée Lauder Cos. Inc. may be considering divestitures in makeup and hair.

Growth is important, but so is profitability, sources said — especially when it comes to direct-to-consumer businesses.

“In dtc, the old days of trading off rapid growth with no profits is a nonstarter,” said Andrew Shore, managing director at Moelis.

“Strategics and private equity groups are looking for an earlier proof point that the business might not be scaled into full profitability but can show some level of profit at the bottom line,” said Intrepid managing director Steve Davis.

Valuations in the sector are slowly shifting from revenue-based multiples to profitability-based multiples, according to Michael Toure, founder and chief executive officer of Toure Capital. “Now, people will look at profitability,” Toure said, though he noted that isn’t the only thing buyers will look at — “We are not there yet where businesses get valued only on the profitability vertical.”

Global potential, too, has never been more important. Buyers want brands that either have, or could, expand into China and the rest of the Asian market, experts noted.

“All brands need to be able to enter Asia — China cross-border, or Sephora Southeast Asia — everybody’s looking for brands that have some sort of Asian presence,” Westfall said.

But it’s not interest from the sell-side. Increasingly, buyers are coming from Asia as well. “We also see an increase in interest and action from Chinese and Asia buyers looking to accelerate Western brands that have demonstrated success in the region, either through Tmall or Sephora China. People have talked about interest from that community for a long time, but now we’re starting to see that translate into activity,” McPhilliamy said.

Some executives expect further consolidation among travel-retail operators, as their businesses have practically ground to a halt for months on end while debt has accumulated.

The other area of increased buyers is special purpose acquisition vehicles, which have permeated the public markets over the past year. Hims recently unveiled that it would go public via a SPAC acquisition at a $1.6 billion valuation, and industry sources noted that could be the case for other companies as well. Several beauty businesses have openly talked about the possibility of the public markets, including Morphe parent company Forma Brands, Glossier and Il Makiage.

“More and more companies that are getting to be of a certain scale — $150 million-plus revenue size — a number of them are starting to think about, is a strategic exit what we’re really going to be looking for in terms of a deal, or does it make sense at some point to consider the public markets?” Goldman’s Gandhi said.

Top Three Takeaways

1.M&A activity is expected to pick up heading into 2021, as big beauty looks for brands that reflect many of the permanent consumer changes wrought by the events of 2020.

2. Key areas of interest include skin- and hair-care brands, wellness-oriented companies, technology plays, men’s and even manufacturing.

3. China is increasingly important — from both the buy and sell perspective.

Sidebar:

Brands With Buzz

Here, the companies that analysts expect to see considering M&A options in the year ahead.

Aroma-Zone, the French, natural DIY cosmetics brand, is preparing to go on the block, according to industry sources. Its first store opened in Paris in 2014, and was followed by six others in France, while the brand’s online sales have boomed. Aroma-Zone is reportedly expecting about 100 million euros in 2020 sales.

Bios Line, an Italian manufacture of natural cosmetics, food supplements and medical devices for personal care and wellbeing, is reported to have garnered interest from numerous funds, including 21 Invest. Bios Line reportedly generated more than 30 million euros in 2019 sales.

Men’s brands are hot right now, which sources said is because of Millennial men taking personal care routines into products beyond soap. Several, including Duke Cannon with Houlihan Lokey, Every Man Jack with Intrepid, Manscaped, Brickell Men’s Products, Dude Products and Dr. Squatch are said to be in the market. Industry sources said Duke Cannon has about $50 million in sales and $10 million in Ebitda, that Manscaped has about $100 million in sales, and that Dr. Squatch has about $100 million in sales with $10 million in Ebitda. Manscaped ceo Paul Tran told WWD in an emailed statement: “So many rumors going around. Manscaped is much larger than that [smiley face].”

Erno Laszlo’s Firmarine Lift Face Powder Mask. Courtesy Photo

Erno Laszlo is expected to come back to the market next year, industry sources said. The business has done well in China and set up a team there, and is said to have $120 million in retail sales.

Eve Lom and Kevyn Aucoin are at least two of the brands Manzanita Capital is said to be shopping around. Eve Lom was founded by the eponymous facialist 30 years ago and acquired by Manzanita in May 2013. Industry sources estimated it has sales between $17 million and $18 million. Manzanita bought the color-cosmetics brand Kevyn Aucoin, now estimated to have sales between 20 million and 40 million pounds, two years later.

Shampoo and conditioner bottles from Function of Beauty. Courtesy Photo

Function of Beauty is said to be in the discussion process, but close to inking a deal. The business started by making customized hair products, and has since branched into other product categories.

Goli, a brand that makes apple cider vinegar vitamins, is said to be navigating inbound inquiries with the help of Centerview. Industry sources said the brand is surprisingly big with broad distribution and a solid direct-to-consumer business, with about $300 million in net sales.

Gray Away, a small brand that’s part of Mana Products, is said to be coming to market with Threadstone. The business is said to have $10 million in sales.

Il Makiage is best known for shade-matching foundation online. Moti Fishbain

Il Makiage has hired Centerview to explore a possible sale or IPO, the company confirmed to WWD. The business is expecting $150 million in net sales for 2020, after successfully building and scaling an online makeup business.

Kitsch, a hair accessories business, is said to have hired Financo to explore options.

Madison Reed Radiant Cream Color. Maria del Rio

Madison Reed, the direct-to-consumer hair color business, is said to be raising another round, according to industry sources.

Merci Handy, a French personal-care brand conceived for Millennials, is said to be looking either for further investment or maybe a sale. The brand, whose hero product is a hand sanitizer, just entered the U.S. and U.K. Its estimated annual sales are about 20 million euros.

Tata Harper’s Clarifying Mask Courtesy Photo

Sources are also talking about Tata Harper, which is also said to be evaluating potential options.

Industry sources said the investment community remains interested in Thrive Causemetics, which is said to have hired Goldman Sachs to evaluate options.