Why L'Oréal bought Australian skin care brand Aēsop at a $2.5 billion valuation

L’Oréal (LRLCY) announced earlier this month it plans to acquire Australian skin and hair care brand Aēsop from Natura & Co (NTCO).

The deal, which values Aēsop at $2.5 billion, represents L’Oréal's largest acquisition to date as it looks to expand its presence in the luxury market and in China. And although the size of the deal has garnered attention, it is in keeping with the French beauty giant's deal-making playbook.

"It is the biggest acquisition that L’Oréal has ever done," Pauline Brown, former LVMH Chairman of North America, told Yahoo Finance Live (video above). "I might argue this was one of Australia's biggest success stories in the consumer-branded world."

Founded in 1987, Aēsop has gained a global following for its vegan skin, hair, and body care products. The Melbourne-based company's signature amber bottles have been spotted across retail and beauty spaces as well as in hospitality venues like hotels and resorts. In 2022, Aēsop reported $537 million in sales.

Although L’Oréal typically goes for smaller brands, M&A has been a core part of the French beauty giant's growth strategy for decades. L’Oréal has been scooping up skin care brands in particular in recent years, adding Skinbetter Science, Youth to the People, Takami, and Thayers Natural Remedies to its portfolio since 2020.

In order to buy Aēsop, L’Oréal reportedly outbid other top players in the space, including LVMH (LVMUY), Shiseido, and Clarins, according to the Financial Times.

"L'Oréal has done a lot of acquisitions over the years, but [Aēsop is] actually not a very big company next to the size of L'Oréal," Brown said. "So it's very affordable vis a vis the total size of their revenues and portfolio breadth."

Despite the high valuation, L'Oréal is still paying "a healthy price" for Aēsop, Brown added, noting that the deal provides "great positioning" for L'Oréal to cater to sustainability-minded consumers and continue its global expansion.

"Aēsop is the epitome of avant-garde beauty, whose products are not only made with great care and exceptional attention to detail; they are a superb combination of urbanity, hedonism and undeniable luxury," L’Oréal Groupe CEO Nicolas Hieronimus said in the press release. "Aēsop taps into all of today’s ascending currents and L’Oréal will contribute to unleash its massive growth potential, notably in China and Travel retail."

Aēsop poised for 'a huge wave' in China

Aēsop products are sold across 400 locations in Europe, Australia, New Zealand, and Asia, but its emerging footprint in China may be its biggest growth opportunity.

The company opened its first store in mainland China in 2022 and is poised to expand beyond its Shanghai location with the help of L'Oreal.

"China is a huge market for L'Oréal," Brown said. "It's a huge market for every beauty player, but particularly for the big consolidated ones. And in the case of Aēsop, 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'Oréal, with the ability to plug into L'Oréal's infrastructure, I think they're going to see a huge wave."

According to Brown, the Aēsop brand is well-positioned to take advantage of current trends among Chinese consumers.

It's also benefitting from the resilience of the beauty industry as a whole — particularly within the premium segment, which Aēsop is a part of — even as economic uncertainty weighs on other consumer goods categories.

And since beauty sales moved largely online during the pandemic, Aēsop capitalized on this shift and created a strong online presence, with 30% of sales coming from e-commerce, Brown said.

Aēsop "has way outpaced the growth of the total beauty sector," Brown explained. "And I would say it's probably outpaced almost all of the L'Oréal brands in terms of its recent performance, top and bottom line."

"This is a great business," Brown said. "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."

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