Japanese Cosmetics Giant Shiseido to Buy Bare Escentuals for $1.7 Billion

Bare Minerals, the makeup line that's an infomercial staple in the U.S, will turn up on department store counters in Asia soon, after its parent company, Bare Escentuals (BARE) agreed to be bought by Japan's leading makeup company, Shiseido (SSDOY).Shiseido said it will buy Bare Escentuals in an all-cash deal worth up to $1.7 billion. The company already had agreements to buy stakes from CEO Leslie Blodgett, the entrepreneur that created the mineral-makeup line, and Berskhire Partners LLC, the investment group that owns 16% of the company. Now, it will offer investors $18.20 per share -- a 40% premium over the company's recent stock price -- for the rest.

Crossing Cosmetic Borders

For Bare Escentuals, which currently derives 85% of its sales in the U.S., the deal will allow it to tap into some rich and growing markets in Asia, including China. For Shiseido, it will provide a better foothold in the U.S., where its own brand has a cult following, at best. "[The deal] enables Shiseido to move towards our goal of becoming a global player," said CEO Shinzo Maeda said in a statement.

Shiseido, which is sold mainly in U.S. department and specialty stores, has made several unsuccessful attempts to crack open the American market -- one experiment in 1999 involved opening a showroom storefront were customers could sample the products, but not buy them, so as not to alienate the department stores. But it has remained a cult brand, at best, getting most of its exposure from fashion magazines and makeup professionals.

At the same time, Shiseido has found that its $24-billion home market is increasingly tapped out. Japan's population is shrinking and aging while its economy lags the rest of Asia in emerging from the global recession.

Attractive Growth and Valuations

Bare Escentuals is an attractive company; it has managed to ride out the recession while continuing to grow, which is no mean feat for a company whose products are strictly a discretionary purchase. It posted a 4% increase in sales during the third quarter and a slight decrease in net income, $22.6 million, or 24 cents per share, compared to $22.9 million, or 25 cents, the year before. The forecast for the fourth quarter is 26 cents a share, matching the numbers for the year-ago period.

With the yen hitting a decade-high against the dollar last year, U.S. companies have become attractive takeover targets for Japanese suitors. Last year, Kao Corp (KCRPY), a Japanese personal-care conglomerate, acquired German hair care line Reichardt and beverage company Suntory bought the French Orangina Schweppes.

The $1.7 billion price tag on this deal may seem high, but the morning after the announcement, Bare Escentuals' stock spiked up 42% to nearly match the offering price by lunchtime. The number of shares traded was more than 43 times the average trading volume for the month before the deal. Investors were buying it -- literally.
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