By Xunliang Huang (University of Melbourne), Albert Ibekwe, Junqi Wang and Sean Millar (University of St Andrews)
Photo: the blowup (Unsplash)
Overview of the deal
Acquirer: L’Oréal Group
Total Transaction Size: $2.53bn
Closed date: Q3 2023
Target advisor: Morgan Stanley, Bank of America (Financial), Davis Polk & Wardwell, Baker McKenzie (Legal)
Acquirer advisor: Centerview Partners (Financial), Latham & Watkins (Legal)
L’Oréal, the largest cosmetics company by market cap, announces its acquisition of Aesop, a luxury skin and body care company known for its unique aesthetics, based in Melbourne, Australia. Aesop was 100% owned and offloaded by its Brazilian parent company Natura & Co for AU $3.7 billion (US $2.53 billion). The deal is the largest acquisition pursued by L’Oréal to date. The success of Aesop also puts Australia on the map for international investors looking for M&A opportunities in the luxury cosmetics sector. From Natura & Co’s perspective, the divestment of Aesop would help it reduce debt and focus on other strategic priorities, including its investment plan in Latin America, continuing to improve The Body Shop’s business and refocusing Avon International’s footprint.
“Aesop taps into all of today’s ascending currents, and L’Oréal will contribute to unleash its massive growth potential, notably in China and travel retail.” - Nicolas Hieronimus, CEO (L’Oréal)
Company Details (Acquirer - L’Oréal)
L’Oréal currently owns 36 brands ranging from affordable consumer products such as L’Oréal Paris and Garnier, to the L’Oréal ‘Luxe’ line including Lancome and Armani, to professional products and dermatological beauty products. In the past decades, L’Oréal has been actively pursuing M&A opportunities as a core part of its growth strategy. According to Brown, former LVMH Chairman of North America, the acquisition of Aesop facilitates L’Oréal’s next strategic move into the Chinese market.
Founded in 1909, headquartered in Clichy, France
CEO: Nicolas Hieronimus (2021-)
Number of employees: 88,000
Market Cap: $232.6bn (as of 28/04/2023)
LTM Revenue: $38.3bn
LTM EBITDA: $8.3bn
LTM EV/Revenue: 6.9x
LTM EV/EBITDA: 31.6x
Recent Transactions: Youth to the People (2021), ModiFace (2018), Valentino global licensing partnership (2018)
Company Details (Target - Aesop)
Aesop is a leading luxury skincare brand that originated in Melbourne, Australia in 1987. The brand is renowned for its exceptional plant-based skincare products that are created through a blend of traditional and innovative techniques. Natura acquired Aesop in 2012 and expanded its retail presence from 60 to over 400 stores globally. This expansion has helped the brand achieve a tenfold increase in revenue, with a reported $537 million in sales in 2022.
Founded in: 1987
Headquartered: Melbourne, Australia
CEO: Michael O'Keeffe
Number of employees: <2,000
LTM Revenue: $537mn
Projections and Assumptions
The all-cash sale by Natura to L’Oréal benefits both parties from a financial as well as an operational ground. For Natura, the proceeds from the sale will allow the company to deleverage and re-target its focus on its Avon brand and steadily improve the Body Shop business. For L’Oréal, the cash consideration, despite being large, has little impact on L’Oréal’s leverage given L’Oréal’s size in the cosmetics and personal care sector. Post transaction, if completed, Aesop will sit in L’Oréal’s Luxe portfolio along with an American skincare company acquired by L’Oréal in 2021, Youth to the People.
However, one potential downside for the proposed acquisition is whether the Aesop brand will retain its unique edge and retain its loyal following customers. Aesop is known for its vegan product line, minimalist aesthetics, and top-notch customer service with accessible samples and sinks in stores so customers can test products on their hands. With the acquisition announced, Aesop’s existing customers may feel concerned that the L’Oréal conglomerate may change its product offerings or services to cut costs.
The $2.53 billion deal for Aesop was L’Oréal’s largest buyout in its history. The French conglomerate is positioned to expand its presence in high-end, natural beauty cosmetics with a focus on international expansion, particularly in China. Aesop has sustainability and clean ingredients as priorities, which has gained it significant popularity amongst millennials. This space is growing and has proved profitable for Aesop which has achieved an astonishing 87.1% gross margin, outperforming L’Oréal’s own of 72%. As part of the L’Oréal brand, Aesop is expected to accelerate its already large 20% growth rate (2021-22).
The acquisition of Aesop is expected to follow the successful playbook of previous acquisitions, such as that of YSL. L’Oréal will apply its strong distribution channels particularly in the far east to expand the reach of Aesop’s products. Aesop will be brought under the $34bn operational support and marketing umbrella of L’Oréal, smoothing out supply chain issues, adding expertise and reducing operational costs.
China presents a significant long-term growth opportunity. Aesop is expected to benefit from L’Oréal’s existing distribution channels in China, facilitating its expansion in the country. Although China's reopening has been slow, the potential for expansion in the country over the long term will be a key driver of value in this deal.
The growing consumer demand, particularly among millennials, for sustainable products creates a large and growing market for Aesop. With L’Oréal’s marketing expertise, demonstrated by its successful track record of creating luxury brands such as YSL, the acquisition of Aesop provides a strong platform for L’Oréal to carve out a niche and capture market share in the sustainable skincare market over the long term.
Risks and Uncertainties
A possible boycott
While L’Oréal itself does not test on animals, they outsource a lot of their testing which does get done on animals. In 2006, L’Oréal acquired The Body Shop. For over a decade, customers boycotted The Body Shop because of public knowledge that L’Oréal was involved with testing products on animals and was thus not cruelty-free. A similar outcome could be observed with Aesop, which is certainly a risk factor for the acquisition.
In addition, the integration of two quite different business models poses a potential risk. Aesop is known for its emphasis on organic ingredients and sustainability, whereas L’Oréal is a multinational conglomerate in the beauty industry that operates with a business model that is of a much larger scale. The integration of the two companies may present Aesop with a challenge of retaining its distinct brand identity and values while simultaneously achieving the desired synergies with L’Oréal. However, being one of the largest companies in the industry, L’Oréal is well positioned to address these risks.
“We have great confidence that this strategic acquisition will join the L’Oréal Luxe Billionaire brands club and therefore contribute significantly to the growth of the division in the years to come.” - Cyril Chapuy, President (L’Oréal Luxe)