Introduction
On April 3rd, 2023, L’Oréal agreed to buy Australian high-end cosmetics brand Aesop from its Brazilian owner, Natura & Co, for an enterprise value of $2.5bn. The transaction is still subject to regulatory approvals and is expected to close in Q3 2023. This deal is widely considered as “unconventional” for the French beauty giant, which is known for its slow-and-steady deal making strategy of acquiring smaller brands and then rolling them out internationally. A typical example is its acquisition of the budget skincare player CeraVe for $1.3bn in 2017, which went viral on TikTok later and reached $1bn in sales in 2021. Aesop, in contrast, is a much more mature brand that already secured sales of $550m in 2022, notching a 21% growth from 2021. It is worth noting that this is not the first time L’Oréal got in touch with Natura. In 2017, Natura took over The Body Shop, a British cosmetics company, from L’Oréal for $1.1bn, which, however, cannot be regarded as a success for Natura, as the revenue of The Body Shop dropped from €921m in 2016 to €813m in 2022.
About Natura &Co
Standing as Brazil’s largest cosmetics company, Natura was founded in 1969 by Luiz Seabra, who opened the company’s first store on Rua Oscar Freire Street, an upmarket shopping area in São Paulo. The direct sales business model, which the company is known for nowadays, was not adopted until 1974. For those unfamiliar with the concept, direct selling, also known as person-to-person retail, is essentially a business model where people sell products directly to others. Contrary to the traditional retail model where companies realize sales either by collaborating with cosmetics outlets such as Watsons or Sephora, or by building hundreds of self-owned stores, under direct selling, companies first sell products to the so-called “sales representatives”, who then recommend and sell these products to the ultimate customers through their personal networks. As of 2022, Natura &Co has over 7.7 million consultants and representatives in 100+ countries.
In 1982, Natura started its internationalization process, reaching an agreement with an outsourced distributor in Chile. Capitalizing on the stabilizing economic conditions after the Latin American debt crisis, Natura expanded aggressively in the 1990s to many Latin American countries. Natura went public in 2004, listing its shares on the São Paulo Stock Exchange B3. In 2005, Natura opened a store in Île Saint-Louis, Paris, marking its first show in Europe. However, as direct selling was not so popular in Europe, the company had to resort to the traditional retail model there.
Until its acquisition of Aesop in 2012, Natura relied solely on organic growth to expand internationally. Aesop, by then, was operating in 14 countries with more than 80 stores. Natura secured a 65% interest in Aesop for $71.6mn, funded all by its cash reserves. Three years later, Natura took entire ownership of Aesop by exercising its options. This acquisition enabled Natura to accelerate its growth internationally and learn from Aesop’s experience with retail stores. On the other side, the acquisition also helped Aesop enter Latin American markets. In 2017, as mentioned earlier, Natura acquired The Body Shop with a valuation of €1bn from L’Oréal. By then, The Body Shop was considered one of the world’s biggest cosmetic chains with 3,000 stores in 66 countries, a perfect complement to Natura’s direct selling business. In 2018, Natura reached a landmark of internationalization, with almost 50% of its revenue coming from outside Brazil. The next year, Natura acquired 76% of share in Avon, its biggest rival in cosmetics direct selling, at a $2bn valuation in an all-stock deal. Eventually, the acquisition of Aesop, The Body Shop, and Avon transformed Natura into Natura &Co, the world’s fourth-largest pure-play beauty group. As of 2022, Natura & Co had 32000+ employees and 2300+ stores and franchises, securing $7.4bn in revenue and $590m in net income. Its revenue source is highly diversified in geography, with 30%-35% from Brazil, 35%-40% from APAC and EMEA, 25% from Latin America excluding Brazil, and 0%-5% from other regions.
About Aesop
Known for its premium soaps — a 500ml bottle sells for over £30, Aesop was founded by Dennis Paphitis, a hairdresser in Melbourne, as a luxury skincare brand in 1987. From 2012 to 2022, under the management of Natura &Co, Aesop expanded from owning 80+ physical stores in 14 countries to 269 stores in 27 countries, with revenue skyrocketing nearly 20 times from $28m to $537m. On Nov 28th, 2022, Aesop officially opened its first store in Shanghai, China, beginning its journey in the largest luxury market globally. So far, the company has 53k followers on RED, China’s major cosmetics recommending platform. As a comparison, L’Oréal has 372k followers, seven times that of Aesop.
To build up its high-end identity, each of Aesop’s stores has a unique and concept-led interior design echoing the local speciality, distinctive from other brands. Also, the company has a wide selection of products, ranging from face care, body care, and hair care to fragrances. All its products feature monochrome packaging and a minimalist aesthetic, catering especially to youngsters seeking individuality. In 2022, Aesop stood as the only brand under Natura &Co that carved a double-digit revenue growth (21%), compared to the 0.4% growth of the group in total.
About L’Oréal
Being the largest cosmetics company in the world nowadays, L’Oréal’s history dates to 1909, when a young chemist called Eugène Schueller successfully formulated non-toxic hair dyes in his lab. Soon he began manufacturing corresponding products and selling them to Parisian salons, a business then evolving into the founding of Société Française de Teintures Inoffensives pour Cheveux (Safe Hair Dye Company of France), whose name was later changed to L’Oréal. It is interesting to note that the origins of both L’Oréal and Aesop have something to do with hairdressing.
L’Oréal was listed on the French stock exchange as early as 1963. Starting as a hair-color business, L’Oréal didn’t diversify much into other areas until its acquisition of Lancôme in 1965, which granted L’Oréal a significant entry into the high-end skincare and perfume market. L’Oréal presence in the skincare market was further strengthened by the acquisition of Biotherm in 1971 and Vichy in 1980. In 1988, L’Oréal added to its portfolio the most premium skincare brand Helena Rubenstein, taking advantage of its financial difficulties then. L’Oréal’s acquisition of Laboratoires Roche Posay in 1989 marked its last portfolio-building stage in the 1980s. The 1990s were marked by low M&A activity for L’Oréal, with only two significant brands, Redken, a hair colouring player, and Maybelline, a make-up player, added to its portfolio, the latter of which marked L’Oréal’s official entry into the make-up market. Stepping into the new century, the dealmaking of L’Oréal was revived, with many nowadays loud names being fused into its collection: Kiehl’s in 2000, SkinCeuticals in 2005, The Body Shop in 2006, Yves Saint Laurent in 2008, NYX Professional Make-up in 2014, etc.
Through multi-decades of acquisitions, L’Oréal group now operates across 150 countries, owns 36 brands, hires 86k employees, and realises revenues of €38.2bn. The giant is organized as four complementary divisions: L’Oréal Luxe, Consumer Products, Active Cosmetics, and Professional Products. Among them, L’Oréal Luxe (incl. brands such as Lancome and Biotherm) contributes the most to L’Oréal’s revenue (38.2%), and Active Cosmetics (incl. brands such as CeraVe and Vichy) acts as the fastest growing (21.9% YoY) and most lucrative division (25.4% operating margin). In terms of geographic reach, L’Oréal’s revenues from three major markets: Europe, North America, and Asia, were quite balanced, all at around €11bn, while the rest of the world combined contributed €5.34bn. It’s worth noting that L’Oréal’s performance during Covid-19 was resilient, notching a 23.4% sales growth from 2019 to 2022.
Deal Structure
L’Oreal acquired Aesop from the Brazilian pure-play cosmetics firm Natura & Co for an enterprise value of $2.525bn. Despite this deal being small relative to L’Oréal’s market capitalization of around €222bn at the time of writing, the acquisition is still the largest in the firm’s history, surpassing the 2008 acquisition of YSL beauty for $1.7bn. The acquirer will pay for the target entirely in cash, as L’Oreal managed to grow profits substantially during the pandemic, as worries that lockdowns would lead to reduced cosmetics sales failed to materialize. Before the acquisition, L’Oreal had around $2.6bn of net cash on its balance sheet, suggesting that the acquisition would remove most of the cash L’Oreal currently holds. That is why we anticipate the firm to offset some of its cash flow because of the acquisition by raising new debt.
With sales of $537m in 2022, the L’Oreal will be paying just under 5 times sales to acquire the Australian-based luxury cosmetics firm. Financial statements for Aesop are not available, meaning that we cannot determine what earnings or EBITDA multiple L’Oreal paid. However, given that the French cosmetics firm beat competition including luxury group LVMH, the cosmetics groups Clarins and Shiseido, and the private equity firms Permira and Primavera, to acquire the firm, we can assume that L’Oreal paid a high price. Nonetheless, analysts believe the firm struck a fair deal: after all, Aesop has been experiencing sales growth in excess of 20%, which is triple that of its close competitors, and has a higher gross margin (87%) than L’Oreal (72%). Thus, L’Oreal anticipates that Aesop will grow into the high valuation it was acquired for.
Deal Rationale
Aesop was the most successful brand in Natura’s portfolio. It had acquired a 60% stake in the firm in 2012, before buying out the remaining shareholders in 2016. During this time, revenues grew twenty-fold. Therefore, it was only reluctantly that Natura sold the firm to pay down its debt, with net debt standing at over 5 times EBITDA before the sale. Any number in excess of 3 times EBITDA is generally seen as risky. Natura considered only selling a stake or spinning off Natura via an IPO, but ultimately decided to sell the entire business. Since, as discussed above, Natura is likely to have received a very high multiple for its Natura sale, we expect that the loss of EBITDA because of the Aesop sale will be more than offset by the funds received for the sale, meaning that Natura will be able to deliver effectively. The lower debt burden will allow Natura to focus its efforts on its other brands, which include The Body Shop, which it bought from L’Oreal for $1bn.
L’Oreal had many motives for acquiring Aesop, with the first one being its high growth rate. In the last ten years, its sales grew from $22m to $537m, expanded its store network from 52 to 395, and increased the number of markets it operates in from 8 to 29. This high growth will enable L’Oreal to boost its growth rate by around 1.2% this year, which is a key metric that analysts look at when evaluating the business’s performance. Also, despite being larger than its previous acquisitions, Aesop fits well into L’Oréal’s long-established strategy of acquiring small-to-medium sized cosmetics companies and scaling them into global brands, as the firm still has space to grow.
Specifically, the main growth opportunity for Aesop lies in China. The country is the largest market for luxury goods in the world and the fastest growing market for cosmetics. As the company only recently opened its first retail outlet in China, we can expect this market to contribute substantial revenue growth and thus contribute L’Oréal’s goal of making Aesop the newest addition to L’Oréal’s billionaire brands, those with more than $1bn in sales. Other growth opportunities include travel retail, selling Aesop in airports and other transport hubs, and fragrance, as Aesop only recently launched its first fragrance products. One can anticipate L’Oreal to do well with its transaction, as it has successfully grown brands into global market leaders previously. A recent example is its 2017 $1.3bn acquisition of CeraVe, which rapidly grew into a ‘billionaire brand’, through savvy social media marketing.
Another attractive feature of Aesop is its brand and positioning. Firstly, it operates in the luxury segment. This segment has higher margins than conventional cosmetics and should also be more resistant to economic downturns, due to having a wealthier customer base. Furthermore, Aesop may even benefit from the ‘Lipstick Effect’, which states that consumers buy more small-ticket luxury items, such as lipstick, or in our case a nice soap, during a recession, as they reduce spending on big-ticket luxuries. The second favourable aspect of the Aesop brand is its vegan and sustainable image. One example of this is that Aesop is a certified B-Corp, a certification that states a firm follows certain environmental and social standards. As consumers become more concerned about stakeholders and the environment, this image will serve Aesop well. On a broader company level, L’Oreal will be able to boost its own ESG metrics through the acquisition, whilst also consolidating the firm’s leadership position in the sustainable and vegan cosmetics market.
Market reaction
The market seems to agree with the rationale of the deal, as L’Oreal [OTC: LRLCY] shares surged 1% on the day of the announcement, closing at $90.76. This means that the stock price closed just under 4% off its record high at the start of 2022 and is up almost 25% in 2023. This goes in line with analyst’s opinions, which were overall positive, lauding L’Oreal for acquiring a brand that can be leveraged abroad, most notably in China, which is seen as the main growth market and where Aesop opened their first store one year ago. The stock has since continued to rise, reaching a maximum closing price of $93.94.
Natura&Co [NYSE: NTCO] shares edged 2% higher on April 3rd, only to fall 11% since the day of the announcement. This is still a 7% increase since the rocky start of the year that the company experienced. The initial reaction of the market likely reflects the hefty premium that Natura&Co managed to receive for one of their most successful brands, but the following sharp decrease in the company’s stock could mean investors are still worried about the growth deceleration that Natura&Co recently experienced, but it could also just be the uncertainty regarding the company’s restructuring plans and overarching strategy.
Advisors
Natura&Co was advised by Morgan Stanley and Bank of America on the sale of Aesop, with the former serving as the lead financial advisor. Davis Polk & Wardwell acted as the main legal advisor on the deal.
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