Identifying acquisitions as a “high priority,” The Estee Lauder Companies is among a group of larger beauty firms on the lookout for opportunities to secure stronger footholds in emerging geographies or access to new product categories as the global economy improves.

During an Aug. 15 earnings call, Lauder President and CEO Fabrizio Freda noted that the firm, which hasn’t made an acquisition in four years, has significant cash to put towards a transaction and is continuously on the prowl for opportunities.

Per its balance sheet, Lauder has $1.6 billion in cash, most of it overseas.

“Really, our M&A strategy is about buying amazing brands with amazing potential that we can leverage thanks to our great R&D and global reach and create global brands,” Freda said, citing the firm’s M.A.C. brand as an “ideal” type of acquisition.

“Buying a medium-sized brand and making it huge over the years – that is our strategy in M&A,” Freda said.

In terms of category and geographic focus, the exec said the firm is eying skin-care targets across the globe, but particularly in Asia. “Then there are opportunities in all of the areas which are highly profitable and growing and where our portfolio is today not completely filled in,” the exec added.

Lauder is not alone in its M&A readiness as activity across the personal-care industry has picked up over recent quarters.

In an Aug. 14 blog post, market research firm Kline & Company notes: “After a lull following the global recession of 2009, merger and acquisition activity heated back up in 2013 and strongly continues into 2014. ... The beauty industry has clearly emerged from the recession with a number of buyers that have significant cash on the books who are searching for attractive (and often smaller, niche) beauty brands and are willing to pay more than in previous years.”

Kline added that buyers scanning for targets include those “interested in broader product lines, faster-growing segments, new technology and geographic expansion.”

Procter & Gamble Co.’s recently announced plan to shed up to 100 of its brands as part of a streamlining and simplification initiative could fuel M&A deals over the next two years, not only drawing buyers but potentially spurring spin-offs by like-minded firms looking to trim down and refocus on core businesses, Kline suggests ([A#02140901004]).

Prestige Brands Holdings Inc.is another company hungry for acquisitions, and according to President and CEO Matthew Mannelly, P&G has some OTC brands “in our sweet spot.”

He said during an Aug. 7 earnings call that with potential divestitures on the horizon, the market for acquisitions is the most promising it’s been for the past five years and that Prestige Brands is “ready and able to capitalize on new market opportunities” ([A#05140811011]).

L’Oreal SA, with net cash of around €922 million and a track record of significantly growing the value of acquired brands, is another firm that may get into the action.

In June, L’Oreal acquired Los Angeles-based NYX Cosmetics, capturing what it identified as one of the fastest-growing color-cosmetics brands in the U.S. In 2013, NYX’s sales reached $72 million, representing growth of 46% over 2012 ([A#02140623010]).

According to Kline, the acquisition provided L’Oreal with a “young, edgy brand and a stronger foothold in the makeup artist segment.” The market research firm adds that NYX is the “mass equivalent of Urban Decay, making the brand a perfect fit for L’Oreal.”

Kline points out that L’Oreal’s acquired brands are paying off big for the company. “The firm’s first-half results show rapid growth of its Luxury division, driven largely by the success of the brands it had acquired, namely Urban Decay, Kiehl’s and Clarisonic.”

L’Oreal’s Luxe division grew 7.4% like-for-like, or 2.7% on a reported basis, in the first six months of 2014 to reach $590.6 million ([A#02140811003])

In a report dated Aug. 12, First Global Research analyst Rajiv Ghosh notes that L’Oreal’s recent buyback of the 8% stake in its business owned by NestleSA makes it all the more ready for M&A activity “with the uncertainty surrounding Nestle’s ownership now firmly behind the company” Also see "L’Oreal Buys Back Shares From Nestle, Sells Galderma Stake" - HBW Insight, 17 February, 2014.. He refers to a Bloomberg TV interview in which CEO Jean-Paul Agon suggested the firm will seek other acquisition opportunities this year or next, adding: “We are pretty good at seizing brands that are at the early stage of development and making them huge.”

Ghosh credits the company with doing just that with Kiehl’s, which was valued at $30 million when L’Oreal purchased the brand in 2000 and now represents an $800 million business. And L’Oreal has grown sales of Urban Decay by 93% since purchasing the firm in 2012, according to the analyst.

Euromonitor Spies Moves Toward Diversification

London-based market researcher Euromonitor notes in an Aug. 24 blog post that some personal-care and drug companies are seeking acquisitions as a way to “think outside of their existing knowledge base.”

Euromonitor Beauty and Personal Care Analyst Nicholas Micallef says companies are evaluating possible synergies at the intersection of beauty and health care, “diversifying into adjacent categories where there is consumer demand and hence research that is worth investing in.”

An example is L’Oreal’s September 2013 purchase of India-based Cheryl’s Cosmeceuticals, which gave the French firm access to the professional skin-care market in India. He also points to drug firm Allergan Inc.’s purchase of SkinMedica in 2012, which gave it a leading role in the market for physician-dispensed aesthetic skin care.

Other firms that have diversified their portfolios with recent buys include Henkel, which purchased three U.S. professional hair-care brands – Sexy Hair, Alterna and Kenra – in June from private equity firm TSG Consumer Partners ([A#02140609006]).

Under a deal announced in May, German firm Bayer AG picked up Merck’s OTC and consumer-care business, which includes Coppertone sun-care products and Dr. Scholl’s, with plans to use that purchase as a springboard to the top of the global OTC industry ([A#02140512006]).

Potential Targets

Kline will release profiles of potential acquisition targets in the personal-care sector in its upcoming Cosmetics & Toiletries report for 2014, it says.

Companies identified as “primed for acquisition” in the forthcoming edition of Kline’s report include Pasadena, Calif.-based Brad Biophotonic Skin Care, whose line of high-end formulas, developed by former Estee Lauder exec Brad Hunter, launched in 2004.

The comprehensive range of serums, tonics, cleansers and body products employs bio-fermented ingredients for concentrated nutrient value and increased bioavailability, according to the firm’s website. Moreover, the company says, its products are packaged in violet glass that filters out damaging light while admitting violet light that “continue[s] to activate and energize the molecules,” maintaining formulation potency over an extended period of time.

The firm has a “solid reputation and track record in the spas channel” and is growing “nicely” in emerging countries such as Thailand and Indonesia, Kline says.

The report also cites Josie Maran, a range of argan oil-based face-care products, curly-hair specialist Ouidad, vegetable-focused natural-product marketer [Yes To Inc.] and Dr. Bronners Magic Soaps as other potential acquisition targets.

M&A Heats Up As Major Players Eye New Markets, Categories

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