L'Oreal SA will look to expand niche color-cosmetics brand Urban Decay to a global market following the projected closure of its acquisition by year-end, analysts suggest.

Announced Nov. 26, the acquisition gives France-based L’Oreal an opportunity to strengthen its position in e-commerce and the “assisted self-service” retail channel at Ulta and Sephora stores, the firm says.

L’Oreal is purchasing Newport Beach, Calif.-based Urban Decay from private-equity firm Castanea Partners for an undisclosed sum. The prestige brand will join L’Oreal’s Luxe division, which comprises Lancome, Kiehl’s and Yves Saint Laurent.

Urban Decay’s employees will report to Carol Hamilton, president of L'Oreal Luxe USA.

“L’Oreal should be able to push [Urban Decay] through its existing distribution network internationally to capture growth opportunities elsewhere, including emerging markets.” – Sanford C. Bernstein senior research analyst Andrew Wood

“It is the makeup specialist we needed to fully satisfy young women in search of playful colors and inspiration in selective distribution, at an accessible price point,” says L’Oreal Luxe President Nicolas Hieronimus. “It is totally additional to our existing propositions, and as such it will contribute significantly to the growth of the division in the years to come.”

For Urban Decay, the deal will bolster its R&D and help expand its consumer reach.

“L'Oreal's strong innovation capabilities and presence in every channel of distribution will enable Urban Decay to reach its full potential in the marketplace,” states Urban Decay General Manager Tim Warner. “Together, we have great ambitions for the future.”

The Wall Street Journal speculates that L’Oreal paid in the range of $300 million to $400 million, while Sanford C. Bernstein senior research analyst Andrew Wood was more conservative in his estimate, placing the transaction between $220 million and $250 million.

“Of course, with no details of the profitability of Urban Decay, sales multiples are somewhat limited … so the actual price paid may be somewhat higher,” he added.

Urban Decay reported $130 million in sales for its fiscal year ending June 2012, according to L’Oreal.

While the firm is small compared with L’Oreal’s cosmetics empire – and stands to make up just 0.5% of the firm’s revenue – Wood sees the deal as a positive.

“It is very much in line with L’Oreal’s successful M&A strategy from 1980s/1990s/early 2000s of acquiring strong regional/national brands that have international growth potential,” he says in a Nov. 26 note to investors. “L’Oreal should be able to push this brand through its existing distribution network internationally to capture growth opportunities elsewhere, including emerging markets.”

Moreover, prestige color cosmetics represent a robust category with marked growth potential, Wood suggests, citing Euromonitor data projecting that the segment is positioned to grow 4.7% annually in the U.S. from 2012 to 2016.

L’Oreal currently has a 15% share of the premium color-cosmetics market in the U.S., trailing The[Estee Lauder Companies Inc.], which boasts a 52% market share, Wood says.

In a Nov. 26 analyst note, Morningstar’s Erin Lash suggests L’Oreal could benefit from cost synergies “as it looks to expand Urban Decay’s reach to consumers around the world.”

Lash expects L’Oreal to continue adding “smaller, bolt-on acquisitions” similar to the Urban Decay deal and its recent purchases of Essie and Clarisonic to build its portfolio and diversify its offerings for the company’s existing international customer base.

According to Urban Decay’s website, the brand is the largest independently owned color-cosmetic company in the U.S. The brand was founded in 1996 and has cultivated a reputation for edgy makeup products and unconventional colors.

The brand recently launched a new foundation called Naked Skin to much success, it says. The “peptide-infused, light-diffusing” Weightless Ultra Definition Liquid Makeup “blurs imperfections to deliver a flawless finish that looks professionally retouched and feels invisible,” according to Urban Decay’s website.

In clinical studies, use of Naked Skin was associated with 63% more radiance, 61% fewer imperfections, 67% more lift and 66% fewer lines and wrinkles, the brand says. The product comes in 18 “meticulously calibrated” shades for $38 apiece.

Urban Decay had planned to expand into the Chinese market earlier this year, but pulled out following customer outcry over animal-testing requirements in the country ([A#02120716003]).

L’Oreal To Expand Urban Decay Globally Following Acquisition

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