L’Oreal’s $2.53 billion acquisition of Australian premium skincare brand Aesop could equate to about 4.2x sales and 20x Ebitda. The 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.

A new report from Bloomberg Intelligence has found that L’Oreal’s $2.53 billion acquisition of Australian premium skincare brand Aesop could equate to about 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 skin care (3-5x sales and 17-20x Ebitda), though it sits comfortably within L’Oreal’s investment strategy, which already encompasses 11 €1 billion-plus brands.

Achieving a return on investment when the Aesop brand already offers an 87% gross margin and 19.7% Ebitda margin (2022) may look challenging, but L’Oreal’s ability to raise the brand’s operational productivity means Aesop’s €537 million sales could double, leveraging increased scope by building from 400 points of sale, along with ramped up China and travel-retail exposure.

Deborah Aitken, a senior luxury analyst at Bloomberg Intelligence, commented, “L’Oreal’s breadth of category expertise and global exposure enables it to pay premium valuations in order to capture high-quality brands. Luxury skincare and naturals’ swift expansion underpins the $2.5 billion deal for Aesop. 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.

“L’Oreal’s global lead in beauty products still has long-term expansion potential, we believe, owing to evolving brand innovations and acquisitions in faster-growth segments. Offsetting rising local competition, the company’s focus is on prestige, natural brands and digital-beauty platforms.

These appeal to middle-class incomes and younger e-commerce shoppers. The pending acquisition of premium skin, hair and body-care brand Aesop feeds this growth, with premium and derma-skin divisions growing the fastest.

“This is the first major deal this year, and we expect more to follow. L’Oreal has made 18 deals in the past five years, including Logocos in natural cosmetics, La Roche-Posay in skin care, Thayers Natural Remedies, Youth to the People and Skinbetter Science in skin care.”

L’Oreal’s low net debt (€3 billion) to equity of 11% at the end of 2022 and free cash flow exceeding €6 billion based on MODL consensus in 2023 (pre-deals) suggest M&A could accelerate when economies fully reopen.

A dividend-payout ratio of 56% in 2022 meets median range, with a €6 dividend for 2023, up 25% vs 2022. Share buybacks were restricted for years due to the company’s ownership structure, though an effective first refusal between Nestle and the Bettencourt family for each other’s L’Oreal holdings expired in March 2018.

Nestle sold another 22.3 million L’Oreal shares (4%) to the company for cancellation at the end of 2021, lowering Nestle’s stake to 20.1%, while the Bettencourt Meyers’ family holding is 34.7%. L’Oreal’s 10% share buyback runs to October 2023.

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