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Sea Change: Beauty’s Historic Opportunity

By: Andrew M. Apfelberg
Posted: November 9, 2009, from the November 2009 issue of GCI Magazine.

The next quarter or two are one of the few times that true fortunes will be made or lost. This period of emergence from a recession is presenting a historic opportunity for mergers and acquisitions in the beauty industry. Those who fight against the tendency to hibernate until sunnier skies appear will find that the wind is actually at their backs and, correctly harnessed, will accelerate them out of the current downturn and into the most plentiful waters they may ever see.

The coming months are a perfect storm of: (i) valuations coming back down to Earth, (ii) deal structures becoming buyer-friendly, (iii) a significant number of owners needing or wanting to sell, (iv) fewer buyers in the market and (v) financing starting to be available again.

When I graduated business school in 1993, beauty companies were typically getting bought for approximately six times their earnings before interest, taxes, depreciation and amortization (EBITDA). During 2007, the median EBITDA multiple for the industry swelled to around 10. To put that into perspective, the same $10 million EBITDA company that sold for a 10 multiple instead of a six multiple cost the buyer an additional $40 million. This is an increase of more than 65% from the 1993 purchase price.

The jump in EBITDA multiples being paid was not due to the target companies becoming more attractive. Instead, it was largely a result of the overwhelming amount of money that institutional buyers (i.e., private equity firms) were willing to spend in order to beat out their competitors and the ease with which multiple layers of financing could be obtained to lever up the target company. The activity of strategic buyers (i.e., existing companies in the industry) has remained more or less constant. The addition of the institutional investors was what changed the game.

Willing to Deal