Will the macroeconomic turmoil finally burst the beauty M&A bubble?


Markets are collapsing, inflation is at record highs and the geopolitical climate is under pressure. Combine that with the ongoing pandemic, and beauty insiders wonder if the stratospheric M&A scene is going to be entrenched — at least for the foreseeable future.

More than two years after the start of a global pandemic, the economy is shaken and global macro factors could be on the verge of breaking through beautythe M&A bubble. There was a flurry of deals completed in the fourth quarter of 2021 and early 2022 – Procter & Gamble alone bought three companies in three months between November and January. But looking ahead, several bankers said their pipelines for the rest of the year look light.

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Normally, the beauty market is quite resilient to external chaos. Even at the high end, beauty products are seen as affordable luxuries, and consumers have historically been loath to ditch their routines, preferring to cut spending in other areas instead. See Leonard A. Lauder’s Lipstick Index (turned moisturizer and back to lipstick), the mogul’s theory that beauty product sales increase during tough economic times.

While that may be true – makeup sales are rebounding at Ulta Beauty, Elf Beauty and other companies – there are signs that other areas of the industry ecosystem, namely mergers and acquisitions, could experience a slowdown.

“The market is a little tougher now than it was a year or six months ago, and that has to do with the general economic environment, uncertainty around inflation, interest rates interest, geopolitical events in Eastern Europe,” said Marko Horvat, director at Raymond James. He added that even in this context, mergers and acquisitions continue to be a strategic focus for major players in the beauty.

“Anytime there is uncertainty in the economy or in public stock markets, it spills over into the private market,” Horvat added. “It’s mergers and acquisitions as a whole that tend to pull back when the macroeconomic environment is tough.”

While the beauty M&A market is by no means closed – at press time, Nest and Hero Cosmetics were reportedly in the market, and Byredo and Nutrafol had just signed major strategic deals with Puig and Unilever, respectively – it is slower than it has been for several years, sources said.

“There is definitely a slowdown. The pipeline is light,” said Nadia Pelaez, director of the RBC Capital Markets Consumer & Retail group, comparing it to previous years which were jam-packed. “There are currently only a handful of assets in the market that are significant, certainly not the level of activity we saw last year.”

Many of the completed deals so far this year have been with companies seeking growth equity investments or assessing valuation potential, she noted.

Part of the reason it’s slower now is the surge in deals in the fourth quarter, with deals such as L’Occitane’s acquisition of Sol de Janeiro, Edgewell’s purchase of Billie, and the purchase of Youth to the People by L’Oreal.

“Even if it was busy, that doesn’t necessarily mean next quarter won’t be busy. A lot of it is this uncertain economic environment, because right now the funding markets are tough, these deals that were done last year or delayed to early this year, valuations have been inflated. And in light of this uncertain economic environment, people are a little hesitant to deploy capital,” said Pelaez.

Private equity firms are currently “more selective” due to the economic environment, Pelaez said, but companies with good cash flow, profitability, growth and market differentiation will still be able to achieve a high multiple.

But, when private equity firms are going to underwrite a deal as having the potential for a strategic exit, and strategic buyers are trading lower due to market conditions, that can be a problem, said the managing director of Threadstone LP, Ilya Seglin. “You walk into your committee with real real-time comps, and your real-time comps aren’t cute,” he said.

Today, strategic buyers are facing supply chain issues and rising prices, and “unless there’s a compelling or transformative asset, now is probably not the best time.” for them to transact,” Pelaez said.

A source noted that strategic buyers are likely to continue to consider the occasional minority investment, especially as many have set up internal funds to consider smaller deals.

If they’re considering direct acquisitions, it’s for capabilities or companies that add new channels, customers or product innovation capabilities, Horvat said.

Another side effect of the current landscape may be that deals simply take longer to close, Pelaez said.

“People are still willing to have conversations, and I think the valuation environment remains pretty solid,” Horvat said.

The unknown should also have a significant impact. While consumer beauty spending remains strong at present, continued inflation is a risk, experts said.

“Spending is going to move away from the most important items — going out to dinner and things like that — people aren’t going to change their skincare routines,” Horvat said.

“I’m not necessarily seeing a slowdown in beauty spending, but I’m more cautious when it comes to vacations. I don’t know if, in the economic environment we find ourselves in now, it will be an amazing Christmas. People are still buying their moisturizers and lipstick and stuff, and everybody’s ready for the hot girls’ summer, so makeup is on fire,” Seglin said. “Daily spending on beauty is still okay, but who knows where the consumer is going to be, and people are being cautious.”

This could cause sales of some brands to stagnate, which impacts beauty mergers and acquisitions as strategic buyers tend to seek growth, Seglin said.

“What do they usually buy? They buy growth. If there’s not enough growth in the core brands, how do you get growth, you’re going to buy it. Since some of the lenses are also slowing down, what are you actually buying? said Selin.


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