L’Oréal to sell Body Shop to Natura in €1bn deal

Bloomberg

Natura Cosmeticos SA entered exclusive talks to acquire British make-up seller Body Shop from L’Oreal SA, with an offer that values the UK chain at 1 billion euros ($1.1 billion).
An acquisition by Natura would represent a major expansion for the Brazilian cosmetics company, which originated as a direct-sales business like Mary Kay or Avon and expanded its retail operation with the $70 million purchase of Australia’s Aesop in 2013. The deal would give Natura new sales channels and more exposure to developed markets, though Body Shop is in “great need of a turnaround” and will require a lot of work, said Giovana Scottini,
an analyst at Eleven Financial
Research.
“If everything works well, Natura will become a global cosmetics player, which is a whole different animal,” Scottini said. “This might require massive investments in marketing, which is another concern.”
Natura shares dropped 7.4 percent to 30.05 reais as of 5 p.m. in Sao Paulo, the lowest level since April. L’Oreal shares rose less than 1 percent to 190.05 euros at the close in Paris.
Sao Paulo-based Natura is being advised by UBS and has already secured a financing commitment for the deal, a press official said by phone. Natura is studying issuing dollar or euro notes to fund the acquisition and isn’t expecting a tough process to win approval from Brazil’s antitrust agency, the press official said. L’Oreal is being advised by Lazard.

Political Turmoil
A Brazil-U.K. transaction is unusual given the political turmoil in both countries, which has wreaked havoc on markets. Thursday’s U.K. election left the ruling Conservative Party short of an overall majority, causing the pound to fall 1.8 percent. Brazilian President Michel Temer, who has thrilled investors by championing economic reforms, was implicated last month in a bribery scandal, sending the real reeling.
The transaction with Natura would open a new chapter for Body Shop, which was founded in 1976 by British entrepreneur Anita Roddick and has spent the last decade under the ownership of L’Oreal. For much of that period, the 3,000-store business struggled to contend with tough competition, leading L’Oreal to announce in February that it was exploring its options.
For L’Oreal, the planned deal is “good news given the underperformance of the division in past years,” Hermine de Bentzmann, an analyst at Raymond James, said in a note.

‘Perfect New Owner’
The Brazilian company fended off competition from private-equity bidders. CVC Capital Partners, Advent International Corp. and Investindustrial Advisors SpA were among firms that also made proposals to L’Oreal, according to people familiar with the matter.
Body Shop operates across 66 countries. Its operating profit fell 38% to 33.8mn euros last year.
Natura is coming out of a tumultuous year that saw the exit of CEO Roberto Oliveira de Lima, whose attempt to raise prices backfired. Sales rose 0.2 percent last year to 7.91 billion reais ($2.43 billion). The Body Shop’s total sales, including e-commerce and franchises, fell 2 percent to 1.48 billion euros.
Natura has already lined up financing for the 1 billion-euro acquisition, and Chief Financial Officer Jose Roberto Lettiere said on a conference call with journalists Friday. Natura will fund the Body Shop acquisition through a mix of debt in local and foreign currencies, they said.
To absorb Body Shop, Natura will double its leverage, measured as a ratio of net debt to earnings before interest, tax, depreciation and amortization, to 3.2 times, Eleven’s Scottini said. That could be a challenge for a company that has relied mostly on internal growth, she said.
The advantage for Natura will be having expertise in retail, online and direct sales, Chief Executive Officer Joao Paulo Ferreira said Friday on a conference call with reporters.
“The combined company will be much larger than the sum of the parts,” he said.