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Urban Decay acquisition offers L’Oréal further growth

By Andrew MCDOUGALL , 27-Nov-2012

The acquisition of color cosmetics company Urban Decay will offer L’Oréal the chance to expand in the USA, and give potential to international growth, despite not being a game changer, according to an analyst.

It comes after L'Oréal announced the signing of an agreement with Castanea Partners to acquire California-based Urban Decay. In the fiscal year ended in June 2012, Urban Decay recorded net sales of $130 million.

"Urban Decay will beautifully complement L'Oréal Luxe's portfolio of iconic brands,” said Nicolas Hieronimus, President L'Oréal Luxe.

“It is totally additional to our existing propositions and as such it will contribute significantly to the growth of the Division in the years to come."

Small but significant

Andrew Wood, a financial analyst at Bernstein, believes that although it is fairly small and financial details are scant, the deal is positive for L’Oréal, as it is in-line with its successful M&A strategy from of acquiring strong regional/national brands that have international growth potential.

Based on Urban Decay’s website, the company is the largest independently owned color cosmetics company in the US, although it is still a small player (and a small acquisition) considering the size of L’Oréal Luxe in the US in 2012 or L’Oréal USA, according to Bernstein.

L’Oréal has not disclosed the finances behind the deal, however Wood states that past transactions by the beauty giant would indicate a price of $220m or higher.

“We believe that this deal will give L’Oréal a product portfolio that has international growth potential. L’Oréal should be able to push this brand through its existing distribution network internationally to capture growth opportunities elsewhere, including emerging markets,” says Wood.

Color cosmetics

According to Euromonitor, L’Oréal has a 15 percent share of the premium color cosmetics market in the US, ranking second behind Estée Lauder (52 percent share).

“The Urban Decay transaction is unlikely to run into regulatory issues as the acquired sales are not large enough to distort the competitive structure of the market,” says Wood, adding: “the prestige color cosmetics market in the US is expected to grow at 4.7 percent from 2012-2016 per Euromonitor data...so this is good category.”

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