Breakingviews: Natura takes a bath to pass on Body Shop stink

Natura’s discounted sale of The Body Shop may help breathe new life into the eco-friendly brand. Six years after snapping it up from L’Oréal for $1.1 billion, the $4 billion Brazilian cosmetics giant has agreed to sell the struggling maker of shower gels and body balms to private equity group Aurelius for 207 million pounds ($258 million). The nearly 80% discount to the original price tag reflects the brand’s fading relevance. Buyer Aurelius will need to apply a lot of polish to fetch a pretty penny.

Tuesday’s sale announcement caps off a months-long search for a buyer. Unlike successful luxury lotion maker Aesop, which Natura sold in April for $2.5 billion, The Body Shop has been languishing: Net revenue shrank 15% in the first nine months of 2023 from the year prior, and profit margins are below the industry average. To get rid of the brand, Natura boss Fábio Barbosa had to sell it for a song. Assuming The Body Shop can deliver an adjusted EBITDA margin of 7.7%, same as in the last quarter, on annualized revenue of $680 million, its EBITDA would amount to $52 million. Its sale price, which includes 90 million pounds in conditional payments, is less than 5 times that sum. Sector leader L’Oréal and Estée Lauder trade at multiples of between 18 and 21 times.

The discounted price gives a whiff of distress, but in passing the buck Barbosa can finally focus on turning around the rest of his company. Aurelius, on the other hand, faces a daunting challenge in trying to revive a jaded brand. But there are ways for the deal math to stack up. If Aurelius were able to help The Body Shop increase its revenue by 6.5% a year for five years, the mid-point of expected average growth at L’Oréal and Estée Lauder, and double its potential EBITDA margin to 15% – still below-average versus sector peers – its private equity owner would be able to generate an internal rate of return of just above 30%, Breakingviews calculations show. That assumes Aurelius funds the deal with some $100 million of debt, twice expected EBITDA this year, and uses cash flow to fund investments.

These are bold assumptions. Deal volume for global cosmetics M&A has increased over 500% to $50 billion in the year to October from $7.8 billion in 2022, according to Dealogic data, reflecting growing investor appetite for the segment. Yet improving The Body Shop’s appeal by, for instance, changing its concept and expanding its presence in beauty-focused Asia is not guaranteed success. For The Body Shop, a full makeover is still risky, even when it comes this cheap.