L’Oréal Group’s biggest-ever brand acquisition was announced, to great fanfare. The deal to buy Aesop from Natura & Co initially sent the beauty giant’s already fast-rising share price (over the previous month), even higher, but it came down equally sharply in trading before the Easter holidays.

Nicolas Hieronimus, CEO of L’Oréal Group, has called Australian brand Aesop “the epitome of avant-garde beauty” and promised to “unleash its massive growth potential,” notably in China and travel retail. He believes that the brand’s combination of urbanity, hedonism, and “undeniable luxury” will bring its new French parent some big wins.

Those wins, in the form of accelerated growth, will be sought quickly considering the high proposed transaction value of $2.5 billion. The brand posted sales of $537 million in 2022, up 21% (at constant currency) and Cyril Chapuy, President of L’Oréal Luxe, has stated his “great confidence” that Aesop will join the company’s list of 11 billionaire brands, which is thought to include the likes of Lancôme, YSL, Kérastase, and Armani.

Because It’s Worth It

So, how likely is that lofty target of $1 billion in sales, and is the price overblown anyhow? Bloomberg Intelligence says the acquisition of Aesop could equate to over 4.2x sales and 20x EBITDA, assuming mid-single-digit growth in 2023 and a net debt apportionment to sales (7.5% of group). That’s above the midpoint of acquisition multiples for premium skincare (3-5x sales and 17-20x EBITDA).

Deborah Aitken, Senior Luxury Analyst at Bloomberg Intelligence, commented: “L’Oréal’s breadth of category expertise and global exposure enable it to pay premium valuations in order to capture high-quality brands. Luxury skincare and naturals’ swift expansion underpins the Aesop deal. Demand for premium beauty products will continue to accelerate faster than for mass-market brands, supporting the company’s profitability and enabling cash-led M&A.”

However, the analyst warned that “achieving a return on investment when Aesop already offers an 87% gross margin may look challenging,” but added that L’Oréal had the ability to raise the brand’s operational productivity in order to double last year’s $537 million sales. One way to do that would be to build up the current 400 points of sale (POS), as well as the stated aim of ramping up exposure in China (on the back of the first two physical stores open there in Q4 2022), and in the travel retail channel.

This process may not be all that quick if the brand identity is to remain truly intact. One of Aesop’s USPs is that its individual POS locations tend to be very distinctively designed and not the cookie-cutter approach that would make a brick-and-mortar expansion faster and cheaper.

The Melbourne-based brand is very clear in its position on well-conceived design, saying: “In seeking new locations, our first consideration is to work with what already exists. It is our intention to weave ourselves into the fabric of (a) place and add something of merit rather than impose a discordant presence.” Let’s see how L’Oréal takes that message on board.

Aesop also has other unique elements in its brand DNA such as its signature amber packaging, plant-based ingredients, sustainable vegan formulations, and bespoke customer service that would need to remain intact.

Dealmaking Not Over

At an industry level, Aitken believes that L’Oréal has more acquisition to go. She says, “This is the first major deal this year and we expect more to follow. L’Oréal has made 18 deals in the past five years, including Logocos in natural cosmetics, La Roche-Posay in skincare, Thayers Natural Remedies, Youth To The People, and Skinbetter Science in skincare.”

As the global leader in beauty, the French group “still has long-term expansion potential,” says Aitken, especially in faster-growth segments with a focus on prestige, natural brands, and digital-beauty platforms. She adds, “These appeal to middle-class incomes and younger e-commerce shoppers. The pending acquisition of a premium skin, hair, and body-care brand like Aesop feeds this growth, with premium and derma-skin divisions growing fastest.”

According to Bloomberg Intelligence, L’Oréal Group’s low net debt (€3 billion) to equity of 11% at the end of 2022 and free cash flow potentially exceeding €6 billion in 2023 (based on consensus) suggest M&A deals could accelerate when economies fully reopen.