Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

L'Oreal SA is paying up for three skincare brands from Valeant Pharmaceuticals International Inc. But they're worth it.

The French consumer goods group will hand over $1.3 billion in cash for the CeraVe, AcneFree and Ambi lines. They have combined annual revenue of $168 million, so the price looks pretty punchy.

But while most of the excitement in beauty has been around make-up, particularly the most expensive products, demand for skincare that solves problems has been quietly accelerating.

L'Oreal Strengthens Its Winners
Buying Valeant's active skincare lines should bolster one of its fastest-growing divisions
Source: Bloomberg Intelligence

In fact, L'Oreal's active cosmetics division, in which the three new brands will sit, vies with its luxury cosmetics arm to be its top division.

The company says CeraVe is one of the fastest expanding skincare brands in the U.S., with average growth over the past two years exceeding 20 percent.

Indeed, the new additions will also bulk up L'Oreal's presence in the U.S. -- it says the three brands will nearly double the revenue of its active cosmetics division there. Its organic sales growth in North America has been outpacing its rate in western Europe, so it makes sense to beef up this region. There's also scope to expand the brands further afield.

L'Oreal also probably had little choice but to pay up for the Valeant collection.

As demand for premium make-up has taken off -- think Kim Kardashian contouring and Kylie Jenner lips -- competition in this sector is intensifying.

Add to that sluggish demand as emerging markets run out of steam and millennials' tastes change, and consumer groups are looking for short-cuts to faster growth: that often means pricey M&A. L'Oreal paid $1.2 billion last July for luxury make-up and skincare brand IT Cosmetics.

Beauty Boost
L'Oreal's faster growth justifies its forward price earnings premium to rivals Unilever and Nestle
Source: Bloomberg

It's not the only one. Rival Unilever NV has been snapping up a series of premium personal care lines, most recently high-end hair care brand Living Proof and last year's $1 billion purchase of subscription razor service Dollar Shave Club.

There's another wrinkle when it comes to expanding in problem-solving skincare. Nestle SA has been trying to build its health science business, which includes Nestle Skin Health. Under Ulf Mark Schneider, who became chief executive on Jan. 1, there may be yet more competition for fast growing, consumer businesses focused on health and wellbeing.

Schneider was previously chief executive of healthcare giant Fresenius Medical Care AG, and is a deal junkie to boot, as Gadfly has argued. What's more his warchest might gain if he sells off some of Nestle's traditional businesses, such as U.S. frozen food or confectionery. 

L'Oreal can well afford to pay up for the Valeant skincare brands, says Deborah Aitken, an analyst at Bloomberg Intelligence, given its market capitalization of around 96 billion euros, and free cashflow of 3 billion euros a year. Its underutilised balance sheet will enable several of these bolt-on deals this year, if it can find the right fit.

In this environment, neither L'Oreal nor anyone else can afford to hang around if a strategically sensible acquisition target becomes available. With rivals eyeing its traditional territory, it needed this spot of skin treatment to prevent them blemishing its growth record.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net