Acquisition Overview
On the 3rd April, France’s L’Oréal announced that it had signed a deal with Brazil’s Natura & Co to acquire Aesop, an Australian luxury beauty brand for $2.525 billion – their largest deal to date. The size of the deal showed L’Oréal’s new willingness to grow through big M&A, having previously only targeted earlier-stage companies with less than $500 million annual sales. In contrast, Aesop posted sales of £537 million in 2022. This acquisition also confirms L’Oréal’s recent move upmarket, where consumers are less affected by inflation and rising interest rates. For Natura & Co, the deal is part of a broader organisational reorganisation to strengthen their financial structure and deleverage their balance sheet, as well as prioritise investment in Latin America.
Deal Structure
Subject to regulatory approvals and other customary conditions, L’Oréal’s $2.525 billion acquisition of Aesop will be paid in cash. This is expected in the third quarter of 2023. Morgan Stanley served as the lead financial advisor in L’Oréal’s acquisition of Aesop, with Bank of America and David Polk & Wardwell serving as the principal financial and legal advisors respectively for Natura & Co.
L’Oréal Overview
Founded in 1909 and headquartered in Clichy, France, L’Oréal currently stands as the biggest cosmetics company in the world with 36 international brands. Its major brands include L’Oréal Paris, Kiehl’s, Lancôme Giorgio Armani, CeraVe, and Maybelline New York. As such, managing a portfolio of diverse and often complementary brands, L’Oréal is organised into four divisions relating to a specific market: Professional Products, Consumer Products Division, L’Oréal Luxe, and Active Cosmetics Division. Under the deal, Aesop is to join L’Oréal’s Luxe division. Apart from physical stores, the company sells its products online through e-commerce platforms. With this in mind, L’Oréal has a truly global presence – as of 2019, it was present in 150 countries across three main geographic zones: Western Europe, North America, and the New Markets. In fact, this is at the centre of their strategy towards “universalisation”; this is to become strategically concentrated yet operationally decentralised in order to globalise in respect to local difference.
In May 2021, Nicolas Hieronimus, a L’Oréal lifer, was made CEO of the company. And, having missed out on acquiring Byredo, a Swedish luxury scent brand, which went to Spanish beauty group Puig for $1 billion last year, Hieronimus is said to have “carried” and “fought” for Aesop by heavily courting Natura - who did not initially want to sell the highly profitable brand. This was aided by the fact that both sides know each other previously from when Natura & Co bought The Body Shop from L’Oréal in 2017.
Additionally, over the past two decades, L’Oréal has made a move to add more natural skin care brands to its portfolio. Highlights include Sanoflare, a French producer of organic cosmetics in 2006, and Thayer Natural Remedies in 2020.
Date founded: 1909
Number of employees: 87,400
EV: €5.82B
LTM Revenue: €38.26B
LTM EBITDA: €8.29B
Market Cap: €219.28B
Natura & Co and Aesop Overview
Founded in 1069 by Antonio Luiz Seabra, Natura & Co is a Brazilian global personal care cosmetics group headquartered in São Paulo. Present across 73 countries in all continents except Antarctica, Natura & Co includes brands Natura Cosmetics, Avon, and The Body Shop. It is currently the largest Brazilian cosmetics company by revenue, and, following its acquisition of Avon in 2020, the world’s fourth largest pure-play beauty group. Additionally, as a founding member of the Union for Ethical BioTrade, Natura & Co is considered a highly eco-friendly and sustainable company who uses natural products and works towards a sustainable environment.
However, in recent times, Natura & Co has struggled with shrinking margins and heavy debts following years of expansion fuelled by high-profile acquisition (such as Aesop.) As such, the company saw a broader organisational shake-up last June when former chief executive and executive chairman Roberto Marques stepped down to make way for Fabio Barbosa. Natura has aimed to simplify its structure, also eliminating its sustainable growth officer and chief transformation officer. Barbosa has said that Natura & Co’s main priority is to make the organisation “leaner and able to be more agile.”
Date founded: 1969
Number of employees: 35,000
EV: $5.21B
LTM Revenue: $36.25B
LTM EBITDA: $1.43B
Market Cap: $3.079B
Aesop was founded by Dennis Paphitis, a Melbourne-based hairdresser, in 1987, and gained a steady following for its vegan skin, hair, and body products. In 2009, sales skyrocketed after Aesop took back control of its global distribution from independent distributors and vetted restaurants and cafes that stocked its product. Since, the company has become known for its distinctive dark, apothecary-style bottles, wrapped in white and black labels. Its combination of minimalism and vegan, clean beauty ethos appeals to young customers, upscale restaurants, and interior design lovers. In 2012, Aesop sold a 65% stake to Natura & Co for $71.6 million. Natura & Co subsequently took full ownership in December 2016. It currently has nearly 400 stores in the Americas, Europe, Australia, New Zealand, and Asia – including two stores in Shanghai that have recently opened in the past year. Aesop stores have a distinct, minimalistic aesthetic, with sinks in them to encourage customers to interact and test the products on their hands.
Industry Insight
1) Inflation: consumers deterred from spending on beauty?
Historically, beauty has been recession-proof. In the 1930s, during the Great Depression, cosmetics still managed to hold stable, even as 25% of the US were made unemployed. The cosmetics industry also survived the Great Recession on 2008. Reasons for this are varied, but importantly, consumers can still afford things like lipstick and mascara, even when money might be tight for larger purchases like a home or car. However, cosmetics have seen inflation in the last year, with price per unit increasing 6.5% (this is much lower that the double-digit prince increase in food and other household categories.) However, interestingly, consumers’ perception don’t match the numbers – 27% of customers report that they have felt that beauty products have increased more than other grocery household categories. As such, many consumers are set to reduce their spending on beauty products in the coming year. Nevertheless, not all cosmetics are made equal – some will prove to be more resilient to inflation than others. Of such, “natural”, clean products look to keep their places on consumer shopping lists. Further, the luxury beauty market has maintained its rude health where consumers are less affected by inflation and rising interest rates.
2) A focus on clean and sustainable ingredients
As consumers pay ever closer attention to the ingredients in their products (that it is non-toxic, free of harmful ingredients, and has all the ingredients that are mentioned in the label), the global clean beauty market continues to grow. Valued at $7.22 billion in 2022, the market value is expected to reach $14.36 billion by 2028. Moreover, younger customers seem slightly more inclined to purchase clean products.
Additionally, the beauty industry has seen a considerable shift to a higher consumer focus on sustainability. Sales for beauty and personal care products that have environmental benefits, such as began, cruelty-free, reusable packaging, are seeing elevated growth rates – even over those that only have clean ingredients. Once more, younger consumers in particular tend to be the most interested in sustainable products, with Gen Z consumers 1.3 times more likely to want environmentally friendly products.
3) The ‘skinification’ of beauty
“Skinification” is the presence of skincare-inspired ingredients, trends, and claims across beauty and personal care categories. Its success lies in a well-informed customer base thanks to the advent of social media platforms like TikTok and Instagram, which allow content producers to share their experiences instantly with their followers. Consumers are empowered to platform their consumer-perceived product benefit offerings. For companies to be successful within this trend, they must understand how to interact with a well-informed consumer based and position their product line based on sustainability and multifunctional benefits.
Strategic Rationale
For L’Oreal, Aēsop’s potential for future organic growth makes it a strong acquisition for the French beauty company – who holds M&A and the successful development acquisition at the heart of the company’s culture. Aesop only has a nascent footprint in Asia, where their first store opened in Shanghai in 2022. As such, L’Oréal’s expertise and strong presence in the continent since the 1990s will serve as invaluable guidance as Aesop looks to unleash its massive growth potential, notably in China and Travel retail. Additionally, Aesop has only recently launched a fragrance line, which L’Oreal could capitalise on. The acquisition will further strengthen L’Oréal’s leadership in the natural cosmetics market – a trend ever-growing in popularity. L’Oréal’s ambition, says Cyril Chapuy, president of L’Oréal’s luxury division, is to grow the brand so that it joins the billionaire club in the near future. For Aesop, this would mean doubling in sales.
For Natura & Co, Fabio Barbosa, CEO of Natura & Co, has stated that the divestment of Aesop marks a “new development cycle” for the Brazilian beauty company who are struggling with heavy debts following an expansion push. And, whilst initially keen to retain a stake within Aesop (one of its strongest assets), Natura & Co’s ultimate sale of Aesop will allow the company to strengthen its financial structure and deleverage its balance sheet. Additionally, Barbosa proposes that selling Aesop will allow Natura & Co to “focus on its strategic priorities, notably our investment plan in Latin America”, as well as allow the company to “continuing to improve The Body Shop’s business and refocus Avon’s International’s footprint.” The sale of Aesop will provide Natura & Co some much needed cash to relieve their shrinking margins and heavy debts.
Long term prospects
Whilst L’Oreal will undoubtedly aid Aēsop’s bid to scale-up and expand to China and Travel retail, the French conglomerate will have to tread lightly to ensure that Aesop’s brand integrity and raw material quality aren’t compromised in order to maintain the cult-following it has gained in recent years. Additionally, a deal of Aesop’s size marks a departure from L’Oréal’s usual strategy of buying smaller brands and then rolling them out internationally to boost sales (e.g. its strategy with its acquisition of CeraVe in 2017.) With this in mind, it will be interesting to see how L’Oreal manages the expansion of a company that has already achieved more than $500 million in sales, particularly under the new leadership of Nicolas Hieronimus.
Written by Felicite Baroudel (The Queen’s College, University of Oxford)
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