New year, new deal?
The usual post-Labor Day flurry of beauty brands coming to market was pushed back to later this year, but now investment bankers are expecting it sometime in 2024, although there are many questions over when exactly with the answer depending on a plethora of factors.
“There’s a lot of things boiling in the same pot and we don’t know how the stew is going to come out in 2024,” said Ilya Seglin, a managing director at Threadstone, of what to expect from beauty M&A next year.
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While that includes potential buyers’ financial situations and whether sellers’ valuation hopes can be met, he believes that for now the most important factor is the macro environment.
The U.S. may have managed to avoid recession for now, but there are still concerns over consumer spending amid sky-high interest rates combined with the soaring cost of daily essentials such as groceries. This is leading to many beauty players pushing back plans to formally come to market despite beauty often being viewed as recession-proof.
“The biggest challenge for deals right now is nobody knows where the macro environment is going to go,” said Seglin. “We have to see how Christmas goes, where the consumer spends their dollars. Clearly luxury seems to be challenged. But the beauty of beauty is it’s affordable luxury. So let’s see how they perform.”
Ashleigh Barker, a director at Lincoln International’s consumer group, believes the pipeline is still there and deal launches that were meant for the fourth quarter of 2023 will likely materialize in the first half of next year to ensure the businesses in question are in a strong position.
“Businesses are taking their time to hit their forecasts, to make sure their retail wins are secured, that they have demonstrated proof points achieving profitability or a very clearly visible path to having a sustainable profit margin opportunity,” she said.
That’s not to say there’s no one out there currently. K18 and Dr. Barbara Sturm are among the brands that have tapped bankers to help them secure a deal, with the former recently opening up the process to private equity, while the latter is understood to be courting German buyers. Bankrupt assets of Amyris including Biossance, JVN and Stripes are still looking for buyers, too.
And strategics are rumored to be preparing to off-load an unusually high number of assets, from Unilever to Sanofi to Kao Group to the Estée Lauder Cos., amid increasing pressure from financial markets, meaning they need to over-deliver and focus on core assets in their portfolio.
As for who the acquirers could be in 2024, private equity is thought to be the most likely interested party in strategic assets. One example is Advent-backed Orveon, which has not been shy about its desire to add two skin care brands to its roster, after its purchase of BareMinerals, Laura Mercier and Buxom in a $700 million deal with Shiseido that closed in 2021.
Sasha Radic, a managing director at Jefferies, said: “There’s new players that are coming into the category as a result of strategic divestitures. Sponsor-backed platforms are going to continue to invest and build around those initial investments both organically and through M&A.”
Seglin also stressed that strategics are still very active. Indeed, there is continued speculation L’Oréal could be a potential home for K18 and even the struggling Estée Lauder Cos. may need to pick up some potential drivers of growth.
“There’s definitely some strategic cleanup going on, but at the same time they also need new growth engines. The reality is the strategics are flush with cash and private equity is flush with cash so I think demand is going to come from all pockets,” he said. “It’s just at what multiples and multiples always reflect growth outlook and growth outlook is dependent on what everybody thinks is happening to the macro environment.”
On categories in demand, clinically backed skin care continues to be at the top of companies’ shopping lists with consumers more focused on science, efficacy and ingredients than ever before, while bankers also view that color cosmetics could be a target as it continues on its post-pandemic bounce back. In the latter, bankers said prospective buyers will be looking for innovation.
Fragrance is also an attractive option. “There’s still a renewed and heightened interest around fragrance,” said Barker. “We saw three large transactions get done this year. There’s a lot of eyes on the up-and-coming brands that play to the clean category and some of the more niche artisanal fragrances. They still need more time to scale, but are definitely on the radar for strategics.”
In terms of valuations, she added: “If you look at market data, you see valuations have come down. But there’s still an opportunity to achieve those outlier valuations for the right assets and with the right positioning.”
As for the prospect of beauty initial public offerings, Radic believes much will also depend on the wider economy.
“The 2023 IPO market has been characterized by short windows of activity, with some issuers such as Oddity and Kenvue coming into the market. Coming into 2024, investors remain very selective, so I expect that we’ll need to see improved macro conditions ahead of a broader reopening in IPOs,” she said.