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L’Oréal’s acquisition of Aesop is ‘the biggest it’s ever done’: Former LVMH chairman

Former LVMH Chairman of North America Pauline Brown, who is also the author of “Aesthetic Intelligence”, joins Yahoo Finance Live to break down L’Oréal’s acquisition of Aesop, M&A activity within the wellness space, and the state of luxury consumers.

Video Transcript

SEANA SMITH: Let's get to some big M&A news. French cosmetics company L'Oreal has struck a $2 and 1/2 billion agreement to buy Australian luxury beauty brand Aesop. For more on the deal and what this tells us about the state of the luxury consumer, we want to bring in Pauline Brown, former LVMH chairman of North America and also author of "Aesthetic Intelligence." Pauline, it's great to see you here. So this deal here from L'Oreal certainly marks a shift in terms of their M&A strategy. They normally target some of those smaller brands. What do you make of this and, really, what it tells us just about the growth potential that they see in Aesop?

PAULINE BROWN: Yeah, well, first of all, it is the biggest acquisition that L'Oreal has ever done. L'Oreal spent a lot of acquisitions over the years, but it's actually not a very big company next to the size of L'Oreal. So it's very affordable vis a vis the size, the total size of their revenues and portfolio breadth. This is a great business. It was a great deal. It was a competitive process. There were a lot of companies and private equity players that would have loved to get their hands on this brand. I might argue this was one of Australia's biggest success stories in the consumer branded world.

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And why did L'Oreal want to pay such a premium? Because it is probably in the order of a mid-teen multiple in terms of the 2.5 billion price tag vis a vis a profitability and EBITDA margin of somewhere between 150 and 200 million. So it was still a healthy price, but I think it was a great brand, a great business in terms of its top and bottom line and a great positioning for the world that we live in, which is all about sustainability, which is all about what a Aesop cares about.

DAVE BRIGGS: Nice to see you, Pauline. And you talk about why they made this deal. How does the potential to enter the China market factor in?

PAULINE BROWN: Well, I think that was another growth opportunity for L'Oreal. As you might imagine, China is a huge market for L'Oreal. It's a huge market for every beauty player, but particularly for the big consolidated ones. And in the case of Aesop, they had just entered it last year, just entered China. So they're very late to the game, but with the support of a global player like L'Oreal with the ability to plug into L'Oreal's infrastructure, I think they're going to see a huge wave. And I do think that their positioning would lend itself well to some of the trends we see happening on the ground among Chinese consumers.

SEANA SMITH: Pauline, what do you also think that this maybe potentially tells us about these smaller players getting acquired by the larger players? When you look at L'Oreal, when you look at Estee Lauder, do you see this type of M&A continuing within the space?

PAULINE BROWN: Yeah, well, first of all, there are very few high quality mid-sized independent assets in beauty and in most areas of design driven consumer brands. So there's a scarcity of assets. Estee Lauder has been on that track to buy relatively small brands for now 25 years. I was part of the team back in the day that did their acquisitions. This one is not so small next to some of the deals I worked on.

When I was part of the team that acquired Jo Malone for Estee Lauder, it wasn't even doing 20 million in sales. And Aesop is north of 500 million. So I wouldn't call it a small business vis a vis the industry. It's small vis a vis L'Oreal. I would call it a very solid and high performing mid-tier, mid-size. And yes, I do think there will be others if the others are performing at the level that Aesop has for many years.

DAVE BRIGGS: Interesting. Industry wide, cosmetics, are they recession-proof? Are they-- talk about the potential growth that lies forward.

PAULINE BROWN: So, in general, beauty has outgrown all categories of consumer goods for as long as I can remember. And premium segment of beauty even outgrows the total market of beauty. And I would put this in the premium segment. There are other categories like ultra luxury, the companies like Chanel and Hermes and some of the LVMH brands, that have grown even faster than the likes of an Aesop.

But I would say what is interesting here is beauty has been relatively robust. It has, obviously, during the pandemic, moved largely online. Aesop is about 30% online penetration in terms of its total sales. But more importantly here, it has way outpaced the growth of the total beauty sector. And I would say it's probably outpaced almost all of the L'Oreal brands in terms of its recent performance, top and bottom line.

SEANA SMITH: Pauline, just give us a sense of the luxury consumer because we were saying for months and months and months that the high net worth individual was really fueling the sales of those luxury brands. They weren't worried about or affected so much by inflation. They weren't worried about maybe an impending recession. Is that still the case, or are we starting to maybe see a little bit of a shift?

PAULINE BROWN: We are still seeing very robust sales in the luxury market. What I will say, just segueing from Aesop, is it really isn't a ultra wealthy consumer that's buying Aesop, or, for that matter, most prestige beauty brands. That is a much more democratic marketplace than, say, an Hermes or Chanel that I referenced earlier.

But what we see across the board is there is still a general strength. Some segments of luxury are benefiting more than others. So for example, in fashion and accessories, a lot of the boom is coming from Asian and American travelers in Europe. In fact, that is now shifting sales. But what's happening at home is now happening abroad.

So where people are spending and some of the categories they're spending on is shifting. Travel has been a big beneficiary. But I don't see wealthy consumers pulling back meaningfully, especially as you go into the top 5% of the socioeconomic ladder.

DAVE BRIGGS: No, no sign of that whatsoever. Pauline Brown, nice to see you. Thanks so much.