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30 October 2015 | beautystorebusiness.com Skincare Spotlight IF YOU ARE PAYING ANY ATTENTION TO OUR industry, you cannot help but have noticed that the M&A; scene has heated up. The year 2013 was certainly not stellar in terms of corporate marriages (or divorces). The years 2014 and 2015 to date have been much more interesting. There are numerous factors that explain this new appetite for deals—yet from my vantage point one stands out: It is all about the niche brands right now. Be it the democratic nature of social media, the decline of department-store power or a shift in consumer mood, it is cool to be indie, to be niche, to be small. Big corporations are attracted to small—and see M&A; as a way to fuel their own growth. My friend Sarah Kugelman, founder and CEO of Skyn Iceland, concurs: "It's a crazy time in our business with transactions happening nearly daily with crazy valuations. I haven't seen valuations like this—double-digit multiples on EBITDA—since the late '90s. I think what's truly interest- ing and what I'm seeing for the very first time is strategics' interest in independent companies doing $10 million or less in sales. Prior, private-equity firms could have cared less about these companies as they didn't give good ROIs, but now that the strategics care, the private-equity firms and venture capitalists have to care. So they are starting new funds with new criteria, and this is going to change the face of the M&A; landscape." Indeed, at the WWD Beauty CEO event in May 2014, a top L'Oréal executive stood up in front of an avid crowd stating that no small brand should be wary of pitching him. And at Cosmoprof North America this past July, the excitement about well-positioned smaller brands was palpable—whether in the ever-growing Discover Beauty area or on the Beauty Pitch stage listening to Mark Cuban. WHAT ARE THE CRITERIA? • Small typically means under $50 million in revenue— and typically above $10 million to $20 million; and since to every rule there is an exception, it is worth remembering the acquisition of Baxter of California ($3 million in revenue) by L'Oréal in late 2012. • Per WWD/Beauty Inc: "In terms of category, skin care still attracts the most interest from buyers' but there's more activity swirling around color cosmetics thanks to the success of Urban Decay … and Smashbox … " • The device category is under scrutiny as well, an aware- ness brought to the surface by L'Oréal's acquisition of Clarisonic in 2011 and the more recent joint venture between Unilever and Syneron (Illuminage Beauty). • Asian conglomerates have been very active—both buying and selling. (Did Shiseido start this with Bare Escentuals?) KEY ACQUISITIONS While this is not an exhaustive list, this outlines the key acquisitions of the last 18 months: January 2014: L'Oréal acquires Chinese facial-masks maker Magic Holdings International. (Did this officially start the mask craze?); TPG Growth purchases a majority stake in E.l.f. Cosmetics from TSG Consumer Partners and the brand's founders; Kose Corp (based in Japan) acquires a 93.5% stake in Tarte Cosmetics from founder Maureen Kelly and Encore Consumer Capital. February 2014: Finalizing discussions that started in the fall of 2013, L'Oréal and Shiseido finalize their agreement to have L'Oréal take over Decleor and Carita. June 2014: In a move to bolster its North American busi- ness, L'Oréal purchases makeup brand NYX, known as the "MAC of mass," which reportedly had sales of $93 million. October 2014: Estée Lauder Cos. acquires luxury skin care brand Rodin Olio Lusso. Skin care has always been essential to ELC, and this acquisition shows the company's interest in building new product categories such as oils; ELC also acquires Le Labo. This fiercely independent niche fragrance brand, founded in 2006, is now slightly less independent. November 2014: Continuing in the artistic fragrance arena, ELC acquires Frederic Malle Editions de Parfum, further growing its luxury fragrance portfolio. (Is inno- vation now exclusively dependent on acquisition?); L'Oréal expands its ethnic-market presence with its acquisition of Carol's Daughter, founded by Lisa Price in 1993; Kendo acquires Bite Beauty, which per industry sources then had about $30 million in revenue. Kendo's last acquisition was Ole Henriksen (2011), and the con- glomerate has launched a number of owned brands, including Marc Jacobs Beauty, and Elizabeth and James fragrances; Soap and Glory sells to Boots Alliance UK: this is the perfect marriage of product and retail. At the date of sale, Soap and Glory had sales of about $157 million (per Kelly Kovack of Brand Growth Management). December 2014: In the continuation of its shopping spree, focusing on another product-specific category within skin care, ELC acquires GlamGlow, known for its masks. While the terms of the deal were not disclosed, WWD reported that the estimated purchase price ranged from an initial $100 million up to $220 millon. (GlamGlow's sales in 2013 were estimated to be $90 million across 88 countries); TPG Growth acquires a minority stake in Beautycounter, which offers "safe and effective beauty products" through the direct sales channel. March 2015: Skinfix merges with Sweetspot Labs. This merger made me scratch my head trying to figure out what a brand known for its natural skincare formulations has in common with a gynecologist-recommended brand focused on feminine care. Time will tell; Unilever acquires REN Skincare. While the terms of the transaction were not disclosed, per Euromonitor REN had sales of $110 million in 2014 in 50 countries. This acquisition suggests that Unilever is continuing to grow its personal-care division. June 2015: This suggestion is confirmed by Unilever's acquisition of Dermalogica, one of the largest professional skincare brands with sales reported of $100-plus million. And then Murad a few days later (in early July). July 2015: Castaneda Partners announces the acqui- sition of a minority interest in skincare brand Fist Aid Beauty, known as FAB, founded in 2009 by Lilli Gordon. If someone is buying, someone must be selling. P&G;'s $20-billion beauty business has struggled to keep up with L'Oréal and ELC. Instead of buying brands to make up for Industry M&A; Activity Heats Up Big corporations have been buying smaller, successful companies as a way to fuel their own growth. by Ada S. Polla Photo courtesy of Ada S. Polla; photo by Kelli Dailey, Third Line Studios