Estee Lauder Poised to Shop After Deal Drought: Real M&A

Estee Lauder Cos. is due for a deal.

The $27 billion cosmetics giant is on the verge of its longest stretch without a purchase in at least 19 years, according to data compiled by Bloomberg. The New York-based company, which hasn’t announced any acquisitions since Smashbox Beauty Cosmetics Inc. in May 2010, has a history of turning small takeovers into big-name brands such as MAC and Bobbi Brown beauty products. It’s now in a good position to make another move, Royal Bank of Canada said.

Estee Lauder has almost doubled its cash balance the past four years and it now stands at a record. Buying brands such as Murad Inc., an anti-aging and acne products maker, or Perricone MD, which sells supplements and serums, would help the 68-year-old beauty purveyor bolster its skin-care business, where growth is slowing, said Telsey Advisory Group. The company also could be interested in nail-care company Butter London, according to B. Riley & Co.

“Every three to four years they’ll probably add a deal,” Nik Modi, an analyst with RBC, said in a phone interview. “The environment is right. It really looks like the M&A environment is opening up.”

Jill Marvin, a spokeswoman for New York-based Estee Lauder, declined to comment when asked if the company has considered acquisition targets.

Buying Growth

Estee Lauder has said that it has a goal of generating 1 percent of total sales growth from acquisitions over the next three years. The company has expanded by buying smaller names instead of developing its own lines, including the purchases of closely held Smashbox four years ago and Aveda Corp. in 1997, both of which cost less than $500 million, data compiled by Bloomberg show.

“With the exception of the Estee Lauder brand and Clinique, just about everything else in their portfolio came from an acquisition,” Connie Maneaty, an analyst at Bank of Montreal said in a phone interview.

Should the company fail to announce any deals before the end of May, it’ll be the longest stretch without a transaction. The longest was a four-year period that ended in 2007 when Estee Lauder bought closely held Ojon Corp., a Canadian hair-care company, data compiled by Bloomberg show.

Estee Lauder is “very interested in growing by acquisitions,” Chief Executive Officer Fabrizio Freda said on a Feb. 5 conference call when asked about acquisitions plans.

The shares fell 1.6 percent to $67.30 today.

Bathroom Shelf

Because the beauty-products maker aims to fill as much bathroom shelf space as possible, it will probably target companies similar in size to Smashbox, rather than one large acquisition, RBC’s Modi said.

“They have a proven track record in taking these bolt-on deals and turning them into mega-brands,” he said.

Skin care, the company’s biggest revenue unit, may be an area Estee Lauder would seek to shore up after sales growth slowed two years in a row. The company could target up-and-coming brands that offer innovative technologies, said Telsey analyst David Wu. Closely held Perricone MD and Murad would increase its exposure to clinical technology, he said.

Murad products are sold at Sephora, the cosmetics chain owned by LVMH Moet Hennessy Louis Vuitton SA, and buying Murad would boost Estee Lauder’s presence in specialty beauty retail, Wu said. Estee Lauder sales at Sephora and other specialty stores rose faster than at traditional department store outlets last quarter, according to a Feb. 6 JPMorgan Chase & Co. note.

Sephora Significance

Specialty beauty retailers are “the future of the beauty industry,” said Wu, at Telsey. “If you’re a beauty manufacturer like Lauder or L’Oreal, you want to increase your exposure to this channel.”

Estee Lauder may also pursue the fast-growing men’s skin-care category, Wu said. Peter Thomas Roth, whose cleansers, serums and moisturizers are sold in specialty stores, would help Estee Lauder compete with L’Oreal SA’s Kiehl’s products, he said.

Representatives for closely held Perricone MD and Peter Thomas Roth didn’t respond to requests for comment.

“We have great admiration for the Lauder group of companies and the Lauder family,” said Brenna Israel, a spokeswoman for Murad. “We have not been contacted by them or anyone representing them relating to any interest they might have in acquiring Murad.”

Nail Expansion

Estee Lauder gets 82 percent of revenue from skin-care and makeup products and a category such as nail care could be attractive, said Linda Bolton Weiser, an analyst with B. Riley & Co. Butter London, a premium nail polish and makeup line based in Seattle, would help Estee Lauder expand, she said.

“It’s a very desirable category within the beauty industry, even though nail product growth has slowed,” Weiser said in a phone interview. “It’s a category where their market share is relatively low.”

A representative for Butter London, didn’t respond to requests for comment.

Estee Lauder also has the infrastructure to add to its European fragrance business with designer brands, a move that would improve profit margins, Weiser said. Premium brands account for the majority of money spent on fragrances in Europe, according to Wells Fargo & Co.

While Estee Lauder has a history of using acquisitions for expansion, it doesn’t have to do a deal to continue growing, BMO’s Maneaty said. With a record $1.7 billion in cash at the end of last quarter, the company could increase its dividend or buy back shares instead of doing a deal and still satisfy shareholders, she said.

“Investors want to see them use their cash,” Maneaty said. “And whether that comes through an acquisition, a dividend increase or a more aggressive share repurchase, investors would feel better than just seeing the cash mount on the balance sheet.”

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