The beauty M&A outlook for 2024

Since March 2022, the Federal Reserve made 11 benchmark interest-rate hikes, pushing it to its highest level in 22 years. Consequently, the financial market has been challenged with a persistently high interest rate environment, making borrowing costs prohibitively expensive for certain deals that would otherwise proceed, especially in the private equity space. Inflation was a concern between 2022 and 2023, though the Federal Reserve was able to stave off an official recession through interest rate hikes, which mitigated inflation to 3% by June 2023. The Federal Reserve aims for 2% inflation, which it judges as healthy for economic growth. With all of these macroeconomic concerns, coupled with stagnating salaries for U.S. workers, recession concerns have eroded consumer confidence, creating a self-fulfilling prophecy of poor economic and consumer activity. Lastly, sellers and buyers cannot agree on valuation purchase prices, so many companies are waiting for greener economic pastures before entertaining M&A or IPOs.

“[Stakeholders] are generally concerned with the macroeconomic environment,” said Sasha Radic, managing director of beauty and wellness investment banking at Jefferies. “They’re seeing pressure in international markets like China, which is impacting strategic performance and brands’ ability to drive near-term growth through geographic expansion. We’re seeing inflationary pressures and financing challenges. All of that is creating a higher risk environment for deal execution.”

According to Jefferies analysts, deal flow resumption is expected during 2024. However, macroeconomic uncertainty continues to weigh on forward estimates. Many companies are looking toward holiday spending as an indicator of consumer appetite and sentiment. Analysts also report that brands within the clinical skin-care category are in high demand and that artisanal fragrance brands are also attractive options for acquisition.

Notable fragrance acquisitions in 2023 included Kering Group’s purchase of Creed fragrance in June for $3.8 billion. The same month, PE firm Advent International made a majority stake purchase of Parfums de Marly and Inition Parfums Privés for an estimated $700 million. While private equity is still a big play in the beauty acquisition space, some PE firms have shifted their focus away from the beauty industry. Carlyle Group, which owns men’s grooming brand Every Man Jack, is looking to sell the brand and pull back from investing in U.S.-based consumer and retail companies to focus on other sectors.

Other notable large transactions in 2023 included L’Oréal’s purchase of Aesop from Natura & Co. in April for $2.5 billion and E.l.f Beauty’s acquisition of Naturium for $355 million in August.

“Strategic buyers are being very selective in their deals,” said Radic. “They are looking for portfolio companies that are aligned with their core portfolio. We have seen strategics continue to participate in M&A, but the volume of deals has been significantly lower than in years past.”

The health of formerly active strategic acquirers has also shifted, as there were notable bankruptcies this year, showing that the theme for 2023 was survival of the fittest and a correction for the industry. Several DTC brands shuttered, while notable bankruptcies included Forma, which filed for bankruptcy in January and exited bankruptcy in April. In addition to its own brand and product incubation activities, Forma had previously scooped up Playa hair care in 2017. Meanwhile, publicly traded Amyris Inc. filed for bankruptcy in August after facing ballooning costs associated with supply chain issues and its rampant acquisition and incubation of brands like Pipette, Rose Inc. and Costa Brazil. Several of its brands, including Biossance, Rose Inc. and JVN hair care, have been recently sold at auction for pennies on the dollar, reflecting the contrived sales figures of the brands that were shared publicly. Amyris has yet to exit bankruptcy and has $1.1 billion in debt on its balance sheet.