L’Oreal Bolsters Luxury Segment With Aesop Deal

In its largest-ever acquisition, L’Oreal OR announced it has signed an agreement (expected to close in 2023′s third quarter) to buy Aesop, a luxury skin, hair, and body care brand, from Natura & Co. Natura shopped it around over the past few months and reportedly drew interest from wide-moat LVMH and others. The all-cash sale to L’Oreal values Aesop at $2.525 billion, or 4.7 times 2022 sales of $537 million. While seemingly a high price, it aligns with current and historical valuations of L’Oreal itself and reflects the potential for Aesop and the luxury beauty market. Indeed, it was only a few months ago that wide-moat rival Estee Lauder bought Tom Ford for $2.3 billion (net), or approximately 2.5 times sales.

Known for its vegan and plant-based ingredients, Aesop achieved 21% constant-currency revenue growth and a 22% adjusted EBITDA margin in 2022. Between 2012 and 2022, revenue for the brand increased 1,800% as it greatly increased its product offerings and expanded to 395 stores in 29 markets from 52 stores in eight markets. Even so, Aesop should benefit from L’Oreal’s market-leading marketing and distribution. Specifically, although Aesop generates more than 50% of its sales from Asia, it only recently debuted in China, having opened two stores in 2022′s fourth quarter. Aesop is also underpenetrated in travel retail as compared with many of L’Oreal’s brands.

We view Aesop as a strong addition to L’Oreal’s luxury portfolio and are maintaining our Exemplary capital allocation rating. The impact on our financial projections will be minimal as Aesop will account for less than 2% of L’Oreal’s total sales (estimated at EUR 40.4 billion in 2023) for the foreseeable future. Thus, we are not changing our EUR 326 per share fair value estimate. Although we rate L’Oreal as a wide-moat firm and believe it will continue to benefit from beauty’s global growth, we view it as overvalued at about 36 times estimated 2023 EPS and would look for a better entry point.