November 20, 2019

Breakingviews: Dr. Jart applies prettier M&A than Kylie Jenner

by Breakingviews.

Estée Lauder is doing better than just keeping up with the Kardashians. The $70 billion U.S. cosmetics empire unveiled plans to buy the rest of Seoul-based Have & Be on the same day that smaller rival Coty said it would take control of Kylie Jenner’s eponymous brand of lipsticks and more. It’s an easy-to-judge beauty competition.

The dueling Monday deals underscore the industry’s intensifying quest for youth. For 73-year-old Estée Lauder, whose makeup counter includes Clinique and Bobbi Brown, adding the maker of Dr. Jart represents its first Asia-based acquisition. Profit margins tend to be higher in the region, where multi-step skincare regimens are popular.

Boss Fabrizo Freda, whose company recently blamed Hong Kong and China for cuts to its full-year forecast, also applied his M&A judiciously. In purchasing the two-thirds of Have & Be it doesn’t already own, the implied valuation is $1.7 billion. That’s a little more than 3 times expected sales of $500 million.

Other hot cosmetics startups tend to sell for much more. Jefferies analysts put the median multiple at 4.8 times sales for high-growth beauty transactions. Coty is paying an even higher rate, presumably for Jenner’s star power on social media, with 150 million Instagram followers, as part of the Kardashian posse. The $600 million price tag for 51% of her bold lip-kits and shimmery eye-shadow palettes amounts to 6 times revenue, based on the $200 million in anticipated 2019 sales reported by the Wall Street Journal.

Jenner will undoubtedly help energise the owner of CoverGirl and Max Factor, but Generation Z, who Coty is targeting, is wearing less makeup. Coty’s history of overpaying also precedes it. Earlier this year, it wrote down by $3 billion the value of perfume, haircare and makeup it bought in 2016 from Procter & Gamble for more than $12 billion. Hinging an acquisition around a single individual, however famous, is also a risky proposition.

Dr. Jart, meanwhile, is decidedly less faddish and has built brands by focusing on dermatological science. The Korean parent company also has developed men’s products, an area of rapid growth for the industry. Add up the scores in these financial and strategic categories, and Estée Lauder clearly takes this M&A prize.

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