In Exclusives, Finance, Insight

This article is the second of a three-part series on the M&A beauty landscape. Part one was a look back at the 2016 Beauty M&A landscape. Part two and three provide insight on what 2017 has in store. Read part one

Will activity take a breather next year or will the mergers-and-acquisitions frenzy continue into 2017? We asked a few M&A insiders to dust off their crystal balls and make some predictions looking into next year. Here’s what they had to say.

Vennette Ho, Managing Director, Financo

It is an exceptional time in the M&A beauty market and we don’t see a slowdown anytime in the near future, barring broader macroeconomic factors. We think there will be a robust amount of activity in 2017, driven again my activity at both ends of the spectrum – small growth investments as well as the strategic mega-deals.

Andrew Shore, Managing Director, Moelis & Co

All of the issues in 2016 are the same issues in 2017 except there might not be as many big deals. This is the era of the strategics. They will have a huge buying advantage over sponsors simply because they need these assets more and can pay up. Strategics have recognized that they aren’t great at new innovation. They haven’t created a new brand in years. Creativity has surpassed science. The large companies are willing buyers of creativity and social connections. The big guys just don’t understand social they way a bunch of 30 year founder brands do. I don’t think higher interest rates will matter much for the big guys but it could for sponsors.The only issue I see in 2017 is just one of digestion. A lot of strategics are pretty full and will need time to integrate what they bought.

Rich Gersten, Partner, Tengram Capital Partners 

The pace of activity has been high. Not sure it can sustain. Feels like M&A in color has peaked with all of the recent activity so I would expect other categories to emerge (e.g. hair care, niche fragrance). Skin care growth has slowed as has the M&A activity, as a result. At some point, that will pick up again as well. We have six portfolio companies in beauty at Tengram and we have received significant inbound interest in all of them over the past year.

Deva Finger, Co-Founder Luxury Brand Partners

There has been no signs of a slow down in M&A going into 2017, but the macroeconomy is always a factor. So, if the economy cools off then M&A will likely trail, but M&A tends to react at a slower pace than the public markets, stocks etc. While keeping an eye on the broader market, I anticipate activity M&A to continue into 2017.

Ilya Seglin, Managing Director, Threadstone

As we look into 2017, I expect the level of activity to remain fairly high. I see the fundamental drivers of the activity to continue to play out: large strategics need to buy growth; barriers to entry for new players into beauty continue to come down and smaller companies are much more nimble at leveraging new ways of engaging with the consumer to grow; private equity (and even VC) funding is probably at all-time high in the sector given beauty fundamentals and no lack of exit options (it’s become almost impossible to not make money for PE in beauty). So I expect continued combination of strategic M&A and PE-led investments in this sector.

Matt Jung, President, TrendSeeder

Looking ahead to 2017 there is the potential emergence of new conglomerates and portfolio builders. Interest continues in emerging/global markets. We’ll see emergence of specialized service offerings and the convergence of beauty & health/medical (ex, Skin Laundry, Massage Envy, cryo-therapy, Minilux, Drybar, brow bars, etc.)

Alyssa Gallot-Auberger, Global Chair, Consumer Goods & Retail Industry Group, Baker & McKenzie SCP

In terms of trends in M&A I am of the view that the big luxury groups (including beauty brands) will need to find ways to appeal to the changing (millennial) definition of luxury – via (i) organic growth by refining processes and ensuring legitimacy of product (be it labor standards, verification of product origins, ethical product testing, etc.) – so the need for groups to adapt their processes or (ii) acquisition of the technology / products that will allow them to respond to these demands – will be a driving force. I am also of the view that the need for immediacy (in fashion the “see now buy now” phenomenon) will mean that acquisition targets may very well be in the “support” functions – technology, logistics and the like. Finally, given the increased focus on “experiences” versus possessions in the millennial, in order to succeed, groups will need to incorporate into their product offering an experience – be it travel, concierge service, bespoke goods or experiences and the like – which will likely see groups looking for external expansion in these areas, which are outside of their traditional comfort zone of pure product. I also think that we may see more and more private equity getting into the sector – they have a lot in their war chests and the luxury industry could be a good place for them to spend some of their funds.

I would be remiss if I failed to mention the impact of pure players, online shopping and mobile devices / connected objects (IOT) as also providing further fodder for acquisitions and partnerships.

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