Last week, the beauty industry descended on Las Vegas for the 20th edition of Cosmoprof North America, but all the cocktail party buzz among industry insiders was focused on Paris—specifically, Kering’s headline-grabbing acquisition of French luxury fragrance house Creed. Terms of the deal weren’t disclosed but according to the Financial Times, which cited four sources close to the transaction, the all-cash deal valued Creed at €3.5 billion ($3.8 billion) on revenue of €250 million and EBITDA (earnings before interest, taxes, depreciation, and amortization) of €150 million. At first glance, the industry’s habit of looking at deal values as a multiple of revenue makes the 14x valuation seem outrageously expensive. But, when the company’s enviable 60% EBITDA margins are factored into the equation, the 23x multiple of EBITDA puts the deal in line with the valuation of other premium beauty brands.

Valuation, however, really isn’t the most interesting part of the story. What’s most interesting is how the Creed acquisition telegraphs that Kering’s ambitions in beauty are serious—and Creed is just about the perfect keystone for those ambitions. In February, the French luxury conglomerate announced it would create an in-house beauty division to help create cosmetics and perfumes for its fashion brands, including Bottega Veneta and Alexander McQueen. The new division won’t be able to develop lines for Gucci until at least 2028, when its license agreement with Coty will expire. According to the Financial Times, the Gucci license alone is worth about $500 million in sales a year for Coty. Cosmetic products for Kering’s other crown jewel, Saint Laurent, are currently produced by L’Oréal. It was also announced in February that Rafaella Cornaggia was hired from Estée Lauder to lead the new division as CEO of Kering Beauté, another sign that Kering is serious about its expansion into beauty. She previously worked at L’Oréal and Chanel. So, while valuation might be a big story for investors in BlackRock’s Long Term Private Capital fund, which took a majority stake in Creed in 2020, there’s more to the story for Kering.

Why is Kering spending big on beauty, and why now? After all, Kering was in the beauty business until 2008, when it sold its YSL Beauté brand to L’Oréal for €1.15 billion. It’s all about growth. Beauty is a perfect way to broaden customer and geographic appeal in luxury by offering entry-level access to brands at more approachable price points. Kering has grown its top line more slowly than its luxury rivals, and its revenues and profits are highly dependent on Gucci. The company, controlled by the billionaire Pinault family, is one of the leading luxury goods houses in the world, with a market capitalization of €62 billion, but that’s 1/7th the value of its chief luxury rival LVMH, which has a market capitalization of €446 billion. According to Ariel Ohana, Managing Partner of consumer and tech-focused investment bank Ohana & Co., “It is no secret that Kering has wanted to get back into the beauty business and the situation is quite different than it was back in 2008. Some beauty verticals are growing faster than others and niche fragrance is one of them—and the one with the highest margins. Kering really wanted a sizable business, meaning they did not pursue acquisitions of many of the indie brands that came to market recently. So, after Puig got their hands on Byredo and, more importantly, Estée Lauder bought Tom Ford, and with Diptyque not yet on the market, Creed was a perfect asset for Kering.” Ohana went on to note that several trends support this strategy: “Consumers who predominantly shopped fashion-branded fragrance or celebrity fragrances are now increasingly buying from pure-play fragrance houses, and this has further been accelerated by a shift in China, which has historically not been a high-growth fragrance market, now quickly adopting fragrance and driving substantial growth for niche fragrance houses.”

The growth opportunity from the Creed deal isn’t entirely incremental; the deal may also help to unlock meaningful organic growth for the existing Kering brand portfolio. According to Ilya Seglin, Managing Director at consumer investment bank Threadstone Capital, “The company has started taking existing beauty licenses in-house, so, the deal will allow it to immediately leverage Creed’s manufacturing and sourcing to make its fragrance portfolio more profitable. From a distribution perspective, it will be able to leverage Creed to get sister brands like Bottega and McQueen more placements. There’s also the opportunity to expand the Creed brand into Kering’s substantial travel retail infrastructure, which will drive growth for the brand and has even better margins than traditional retail distribution.”

So, the question on everyone’s mind is, will all this buzz about Creed translate into more strategics paying up for niche fragrance brands? The answer, unfortunately, is probably not. Creed is a unique asset both in terms of size and luxury heritage, which made it a unique fit for Kering. That’s not to say we won’t see more fragrance deals in the not-so-distant future. At some point, French fragrance house Diptyque, currently a portfolio company of Manzanita Capital, may come to market, though there’s no indication it will be for sale any time soon. And, we’ve started to see a meaningful uptick in indie fragrance deals getting done. In the second quarter of 2023, the BeautyMatter Deal Index tracked eight fragrance deals (nine including Creed), including an investment in Juliette Has A Gun by Cathay Capital and Weinberg Capital Partners, Parfums de Marly and Initio Parfums Privés’ acquisition by Advent International, Sandbridge Capital’s Series A investment in Henry Rose, and Fable’s investment in Perfumer H. In the first half of 2023, the index tracked a total of 12 deals, which exceeds the nine in all of 2022 and ties the 12 we saw in all of 2021. So, as the summer heats up, indie fragrance brand owners can breathe a little easier knowing that their category is one of the hottest on record.