As competition heats up, L’Oréal buys an advantage or three
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As competition heats up, L’Oréal buys an advantage or three

The cosmetics industry is heating up right now, as a celebrity obsession-fueled focus on beauty is sending sales of makeup and skincare products through the roof. Prominent reality TV stars, like Kim Kardashian and her Jenner siblings, and the cast of Jersey Shore, all have signature looks that Millennial women (and, increasingly, men) are eager to copycat. The result is a tooth-and-(perfectly-manicured)-nail fight between beauty brands to capture the attention of the market. And Dominion holding L’Oréal has just bought itself three secret weapons.

L’Oréal strengthens its winners
Buying Valeant’s active skincare lines should bolster one of its fastest-growing divisions

SOURCE: Bloomberg Intelligence

L’Oréal has announced that it will purchase skincare brands CeraVe, AcneFree and Ambi from Valeant Pharmaceuticals International Inc. for $1.3 billion. This is a hefty price to pay for brands with combined annual revenue of $168 million, but their potential given the current climate makes them more than worth it. The new brands will sit within L’Oréal’s active cosmetics division, which is already vying to become its primary business.

There’s also an argument from geography: the acquisitions should nearly double the revenue of L’Oréal’s active cosmetics division in the U.S., and the brands have scope for expansion elsewhere.

L’Oréal isn’t the only big beast of beauty in the M&A game, with rivals like Unilever and Nestle seeing a similar shortcut to growth in other brands. But L’Oréal has the advantage when it comes to the pace of growth, and that makes a compelling case for gobbling up smaller businesses that show potential.

Beauty Boost
L’Oréal’s faster growth justifies its forward price earnings premium to rivals Unilever and Nestle

SOURCE: Bloomberg

Writing in Bloomberg Gadfly, Andrea Felsted explains why one of the news sources analysts thinks L’Oréal is on the right track, strategically:

“L’Oréal can well afford to pay up for the Valeant skincare brands, says Deborah Aitken, an analyst at Bloomberg Intelligence, given its market capitalization of around 96 billion euros, and free cashflow of 3 billion euros a year. Its underutilised balance sheet will enable several of these bolt-on deals this year, if it can find the right fit.”

Disclosure
Dominion holds L'Oréal in its Global Trends Luxury Fund.



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