Beauty M&A Update: Excerpt from Consumer Annual Report

Capstone Finds Privately-Owned Brands Are Driving Selling Activity

M&A Overview & Outlook

The Beauty & Wellness sector has continued to demonstrate resilience amid a volatile economic environment—emerging as one of the bright spots in a Consumer industry that has been heavily impacted by macroeconomic headwinds. In 2022, return in Capstone’s Beauty & Wellness public company index amounted to -8.1% which marks a strong outperformance compared to the S&P 500 return of -19.9%. While elevated inflation and prospects of a recession have dampened consumer sentiment, beauty spending has held steady as consumers often refuse to sacrifice personal care routines . Notably, lipstick sales grew 37% YOY through October, according to NPD. (1)

Select leading sector players have captured both top-line growth and gross margin expansion despite an elevated cost environment. e.l.f. Beauty (NYSE:ELF), a leading cosmetics provider, experienced a 33% YOY increase in net sales and 190 basis-point growth in gross margin, according to its Q2 fiscal 2023 earnings release. (2) Price increases, favorable product mix, and brand strength have been key to growing profitability for sector participants.

M&A volume in 2022 of 78 transactions announced or completed eclipsed 2020 levels (69 deals) and nearly met the 2019 total (87 deals). However, large strategic buyers slowed their acquisition pace compared to last year as many public companies filled their M&A capacity in 2021. Notably, public strategic buyers have accounted for 27 deals in 2022, summing to $1.4 billion, compared to 46 deals worth an aggregate $7.1 billion in 2021. This may lend to a fervent return of large strategics to the market in 2023, fueling competition for privately-owned companies.

Key Sector Trends

The prevalence of independent, privately-owned middle market businesses has been a hallmark of the Beauty & Wellness space. In 2022, these companies continued to attract significant buyer appetite with privately-owned target companies accounting for 61.5% of transactions. As the baby boomer generation enters a prime stage to maximize personal liquidity, a wave of transaction inventory in the space is expected to come to market in the near-term.

Beauty & wellness brands and manufacturers with recurring revenue, customer loyalty, and healthy gross margins garnered robust valuations in 2022. Notably, the average M&A multiple from 2018-2022 amounted to 4.0x EV/Revenue and 12.9x EV/EBITDA, bolstered by high profile deals such as Church & Dwight’s (NYSE:CHD) acquisition of Hero for an enterprise value of $630 million and equivalent to 14.0x EV/EBITDA (September). Despite economic uncertainties, buyers have demonstrated a willingness to pay premiums for quality businesses.

Contract manufacturers have emerged as highly sought-after businesses by buyers in the current market. In times of elevated prices, sector players have often turned to outsourced production to bolster efficiencies and cost savings. As a result, outsourced manufacturers have obtained healthy valuations, even at smaller enterprise value ranges. Notably, Turpaz (TASE:TRPZ) acquired Klabin Eco Development for an enterprise value of $24.3 million, representing a 10.1x EV/EBITDA multiple. Capstone expects Contract Manufacturing M&A activity to persist at elevated levels in 2023, particularly as private equity buyers continue to build and enhance platforms in the space.

Our research has uncovered what we believed to be true; that today’s market is highly conducive to the sale of privately-owned beauty brands. The combination of historically high valuations, lots of cash looking to be invested, the resilience of the Beauty sector, and the growth and attractive customer base captured by emerging brands has resulted in over 60% of all transactions being privately-held beauty brands.

Kenneth Wasik, Head of Consumer Investment Banking

This is an excerpt from Capstone's Consumer Annual Report. For additional insights on valuation trends for Consumer companies, acquisition priorities among industry leaders, and dedicated spotlights across nine industry verticals, access the full report here: Annual Consumer M&A Report | Capstone Partners .

To discuss the trends included in this piece, provide an update on your business, or learn more about Capstone’s wide range of advisory services and Consumer industry knowledge, please?contact us .

Endnotes

1.Wall Street Journal, “The Lipstick Index Is Back,” https://www.wsj.com/articles/the-lipstick-index-is-back-11669256641 , accessed November 30, 2022.

2.E.l.f Beauty, “e.l.f. Beauty Announces Second Quarter Fiscal 2023 Results,” https://investor.elfbeauty.com/news-and-events/press-releases/elf-beauty-announces-second-quarter-fiscal-2023-results , accessed November 30, 2022.

Disclosure

This report is a periodic compilation of certain economic and corporate information, as well as completed and announced merger and acquisition activity. Information contained in this report should not be construed as a recommendation to sell or buy any security. Any reference to or omission of?any reference to any company in this report should not be construed as a recommendation to buy, sell or take any other action with respect to any security?of any such company. We are not soliciting any action with respect to any security or company based on this report. The report is published solely for?the general information of clients and friends of Capstone Partners. It does not take into account the particular investment objectives, financial situation?or needs of individual recipients. Certain transactions, including those involving early-stage companies, give rise to substantial risk and are not suitable for all?investors. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied?upon as such. Prediction of future events is inherently subject to both known and unknown risks and other factors that may cause actual results to vary materially. We are under no obligation to update the information contained in this report. Opinions expressed are our present opinions only and are subject to change without notice. Additional information is available upon request. The companies mentioned in this report may be clients of Capstone Partners.?The decisions to include any company in this report is unrelated in all respects to any service that Capstone Partners may provide to such company. This?report may not be copied or reproduced in any form or redistributed without the prior written consent of Capstone Partners. The information contained herein should not be construed as legal advice.?