By Friedrich von Storch, Ties Oudmayer and Enrique Pérez-Hernández (IE University), Saihej Ailwadhi, Kian Patel, Samuel Mccrea, Oliver Platts, Velizav Zlatev, Rhys Merideth (University of Bristol)
Photo: Karly Jones (Unsplash)
Overview of the deal
Acquirer: Estée Lauder
Target: Tom Ford
Total Transaction Size: $2.8bn
Announcement Date: 15/11/2022
Expected Closing Date: H1 2023
Target advisor: Goldman Sachs
Acquirer advisor: Perella Weinberg Partners
On November 15th 2022, Estée Lauder (NYSE: EL) announced that it has entered into agreement to acquire Tom Ford for a consideration of $2.8bn, including debt. The transaction will be settled through a combination of cash, debt, and $300 million of deferred payments due in 2025. The strategic rationale behind the acquisition lies in the strength of Tom Ford Beauty, for which Estée Lauder already holds the licence. Additionally, Estée Lauder will extend existing licensing agreements with Ermenegildo Zegna and Marcolin for its fashion and eyewear businesses, respectively.
Its biggest acquisition to-date signals a pivot for Estée Lauder, which has historically focused on beauty products and owns brands such as Aveda, Le Labo, and MAC Cosmetics. Now, the company is also stepping into fashion as the transaction also includes Tom Ford’s apparel business, which suggests that it is aiming to compete with luxury conglomerates Kering and LVMH in the future. Under the agreement, Tom Ford, founder and CEO of Tom Ford, will stay on as the brand’s creative visionary through to the end of 2023. Domenico De Sole, chairman of Tom Ford, will stay with the company as a consultant until that time. The transaction is expected to close in H1 2023, pending regulatory approval.
“As an owned brand, this strategic acquisition will unlock new opportunities and fortify our growth plans for TOM FORD BEAUTY. It will also further help to propel our momentum in the promising category of luxury beauty for the long-term, while reaffirming our commitment to being the leading pure player in global prestige beauty” - Fabrizio Freda, President and Chief Executive Officer of Estée Lauder
Company Details (Acquirer - Estée Lauder)
Estée Lauder is an American multinational cosmetics company, a manufacturer and marketer of makeup, skincare, fragrance, and hair care products. The company sells products in approximately 150 countries and has 5 offices located around the US.
Founded in 1946, headquartered in New York, United States
CEO: Fabrizio Freda (since 2009)
Number of employees: 48,000
Market Cap: $79.5bn (as of 24/12/2022)
LTM Revenue: $17.2bn
LTM EBITDA: $3.9bn
LTM EV/Revenue: 4.7x
LTM EV/EBITDA: 20.9x
Company Details (Target - Tom Ford)
Tom Ford offers luxury clothing and accessories. The Company offers products such as ready-to-wear and made-to-measure offerings, as well as footwear, accessories, handbags, cosmetics, and fragrances. Tom Ford serves customers worldwide.
Founded in 2005, headquartered in New York, United States CEO: Tom Ford Number of employees: 19,077 EV: $2.8bn LTM Revenue: $805mn LTM EBITDA: $N/A LTM EV/Revenue: 3.5x LTM EV/EBITDA: N/A
Projections and Assumptions
Fashion is often viewed as a long term investment with limited short-run gains. However the sector has performed well relative to others during the economic headwinds of 2022. Even supply chain issues have not mitigated sales as wealthy individuals continue to spend on luxury goods.
Estee Lauders acquisition of Tom Ford for $2.8bn, including $250m from Marcolin in license fees, was its largest ever. Normally synergies are vital during an acquisition, but for an acquisition of this magnitude horizontal or vertical integration can be very beneficial. Estee Lauder takes a risk in operating an apparel business, but it is considered advantageous in the long run as it drives the demand of the Beauty & Eyewear segment. As Estee Lauder has relatively less experience in the apparel sector, it will extend and expand Zegna Group’s license for all men’s and women’s fashion. The conglomerate’s biggest growth opportunities lie within the high-end fragrances like Jo Malone, Le Labo, and Tom Ford that comprise 60% of the category’s profits. In the last fiscal year, Tom Ford Beauty, the fragrance and makeup division which was licensed to Estee Lauder, achieved almost 25% net sales growth compared to the previous year.
Tom Ford has 98 stores globally and excellent exposure to the Chinese market, furthering Estee Lauder’s global presence whilst hedging itself against localised recessions in specific countries. As individual nations slip into recession and with global economic outlook remaining uncertain, risk aversion to specific geographies and markets will be highly beneficial .
After the acquisition Tom Ford stated that “I could not be happier with this acquisition as The Estée Lauder Companies is the ideal home for the brand”. The newly found billionaire will reaimain as a “creative visionary” with the firm until the end of 2023, until then though his experience will no doubt aid Tom Fords synergy with Estee Lauder.
The extension of Tom Ford’s long-term licence for men’s and women's fashion, accessories, and similar products to existing partner Ermenegildo Zegna NV for 20 years, serves as an interesting strategy to create value for all stakeholders. The Italian luxury house will take control of the fashion operations as part of Estée Lauder’s acquisition of the company. The deal comes with a 10-year automatic renewal if minimum performance conditions are reached. Zegna also owns the Thom Browne brand, and with the addition of Tom Ford into the company’s brand portfolio, executives have said they want to further expand into the US following the company’s New York listing late last year.
Estée Lauder’s Chief Executive Officer, Fabrizio Freda, mentioned the acquisition will “fortify growth plans for Tom Ford Beauty”. Tom Ford’s eyewear and beauty units are likely to be their most profitable divisions, according to analysts at Jefferies. Tom Ford’s large brand recognition within fragrances will help Estée Lauder close the gap with rival L’Oréal, given the edge their competitor has with brands including Valentino, Prada, and Yves Saint Laurent. Particularly in China, a crucial market for the industry, Estée Lauder hopes to gain the upper hand. The fragrance market is expected to reach a size of $48 billion by 2027, in contrast to $34 billion in 2021, representing a 6% CAGR.
Risks and Uncertainties
Right now, inflation and macroeconomic challenges are a concern for luxury consumer goods. Economic volatility can be a turning point for trending consumer behaviour, a change that will have to be carefully accounted for. Estée Lauder lacks apparel expertise which leaves some to question the performance of Tom Ford’s eye-wear sales. Whilst there are apparent synergies from high-end fragrance, Estée may not have the strategic experience in this industry to make decisions for their apparel line to navigate this changing demand. Comparison against competing bidder Kering left the market in question regarding which company could create greater value from the acquisition. Kering, a company which owns a number of fashion brands including Gucci and Balenciaga, could discover more realised value from the men’s and womenswear.
Additionally, with Estée Lauder being a much larger institution, the personal creation that Tom Ford previously enjoyed might be diminished. The ability to have quick and adaptable decisions might be reduced, and therefore Tom Ford's ability to remain at the forefront of the market. As a result, the risk arises that Tom Ford might not be able to maintain its leading market position, due to inefficiencies that arise from stifled creativity.