After months of industry speculation, Puig, the Spanish, family-owned manufacturer of fragrances such as Paco Rabanne, Jean-Paul Gaultier, Penhaligon’s, and Nina Ricci, announced on June 4 that it will acquire a majority stake in British cosmetics brand Charlotte Tilbury. Financial terms weren’t disclosed but, according to Bloomberg, the deal valued the company at more than £1.2 billion ($1.5 billion). Charlotte Tilbury, the London-born makeup artist who founded the brand in 2013, will maintain “a significant minority stake” in the company and remain its Chairman, President, and Chief Creative Officer, and Demetra Pinsent will remain as CEO. BDT Capital Partners, a merchant bank that provides family and founder-led businesses with long-term capital, will invest alongside Puig and hold a minority stake.

According to Bloomberg, Puig beat out strategic heavyweights like Unilever, Estée Lauder Cos., L’Oréal SA, and Shiseido Co. to win the deal. Kelly McPhilliamy, Managing Director at investment bank Harris Williams, says the transaction represents “a bold move” for Puig and “reflects the strategic importance to diversify its business and expand in adjacent categories with positive, long-term growth prospects.”

After the uncertainty, upsets, unrest, pivots, PPP, and pandemonium that have come to define the first half of 2020, a billion-dollar acquisition of a hot cosmetics brand would seem to signal a resurgence of M&A activity in the beauty space.

Actually, not so fast.

BeautyMatter Analysis: Puig’s acquisition of Charlotte Tilbury represents a unique confluence of factors that made this deal strategic, albeit expensive, but not easily replicable. According to Michel Brousset, founder and CEO of investment firm Waldencast, Charlotte Tilbury represents “an absolute incremental category with zero cannibalization to Puig’s existing business, which is not the case for other strategics.” Brousset added, the brand brings “more attractive structural economics at the marketing margin level than typical fragrance margins, adds quite a bit of geographical expansion opportunity and brings several new capabilities that Puig needs, such as marketing, digital and procurement know-how and makeup brand management, which is quite different from fragrance.”

Despite the strategic importance to Puig, the valuation ascribed to the deal has raised more than a few eyebrows. According to NPD, prestige beauty as a whole was down 14% in Q1 2020, with makeup leading the charge, down 22%. This was on top of a 7% decline for makeup in 2019. Although recent financial performance at Charlotte Tilbury is not publicly available, it’s thought that the brand is one of the very few in the category to show positive growth in 2019, despite industry declines. Nonetheless, according to Fashion Network, a French fashion, luxury, and beauty publication, 2018 sales were £101 million ($126 million) and EBITDA was £3.8 million ($4.8 million), implying an EBITDA margin of just 3.8%. According to Rich Gersten, founder of True Beauty Capital, “Value is a function of growth and profitability and Charlotte Tilbury’s growth has been very strong over the past year, despite makeup headwinds. It’s also a major strategic move for Puig, which results in a premium. With that said, given the relatively low EBITDA margin, it feels like a very full price.” David Olsen, Managing Director at Highlander Partners, added, “COVID-19 has accelerated what will be a rationalization of valuations and this could be the last billion-dollar plus deal for some time.”

It’s clear that Charlotte Tilbury is one of those truly special brands that has managed to defy industry trends and drive growth through product innovation, savvy marketing and celebrity partnerships, and an extremely talented founder and CEO. But what about other makeup brands? Given that color has been a challenging category for the past few years, with growth rates lagging more attractive categories like skincare, and traditional channels of distribution, like department stores, on life support, is now the time to buy a makeup brand?

Maybe.

According to Olsen, “Pure color brands may continue to struggle but those that have blended makeup and skincare (like Charlotte Tilbury) and that are clean will thrive. Innovation drives the beauty industry and great coverage that also has skin reparative benefits is becoming table stakes. It is no longer an either-or, it has to be both.” Brousset added, “Categories themselves go through cycles. If you take a longer-term perspective, makeup and skincare have always played a bit of a see-saw. A few years ago, skin was declining and makeup was booming. Today it’s skincare, tomorrow it will be makeup’s turn again. Beauty is an innovation-driven category and, while the makeup measured market (emphasis on measured, as DTC volumes, which are booming, is not captured) is declining today, there are brands that are thriving. These brands are connecting meaningfully with consumers and meeting them where they want to be met (which is less at department stores and more on digital or at specialty stores). So, is now a good time? It’s always a good time if an acquirer needs new avenues of growth and new capabilities.”

Addendum: While researching this story, David Olsen, formerly the Global Vice President at Net-a-Porter Group, where he launched the beauty and grooming categories, recounted his first meeting with Charlotte Tilbury and CEO Demetra Pinsent. Here’s his account of that meeting and how the brand was successfully launched on the Net-a-Porter platform. Be sure to check out the YouTube video he shared.

“I remember the first day I met them. Natalie Massenet [Net-a-Porter founder] and Charlotte had an existing relationship, so I was asked to meet with the CEO, Demetra Pinsent, to work with her on the brand’s exclusive global launch strategy on NET-A-PORTER in late 2012. To be honest, as an American, I did not know much about Charlotte, but Charlotte & Demetra were genius for creating content with NET-A-PORTER using other 3rd party brands prior to their launch in order to elevate and cement Charlotte’s legendary status on digital, which was spread to our customers all around the globe. Here’s an example of such content: youtube.com/watch, which to date has 1mm views and features an Anastasia product! Once we launched, the brand was an immediate success and we couldn’t keep it in stock! Post launch we worked closely together creating exciting moments though more content and IRL events, which accelerated the brand even more. When you meet Charlotte in person, you can’t help but be drawn in by her “Darling.” Demetra and Charlotte had a singular focus from that first day: to create the world’s largest cosmetic brand and differentiate themselves by creating looks and educating their clients on which products to use. They also kick-started the trend that your first foundation is your skin, so maintaining beautiful skin comes first, makeup next. They are both forces of nature and I am extremely happy for them and their teams.”