Estée Lauder, Puig Merger Talks Signal Shift in Beauty Power Dynamics

Talk about a heated rivalry.

Beauty’s playing field is shape-shifting like never before after news broke March 23 that the Estée Lauder Cos. and Puig are in merger talks. That comes less than six months after L’Oréal and Kering revealed they were entering into a joint venture, giving L’Oréal, the world’s largest beauty company, even more muscle in the global industry. 

If a Lauder-Puig deal does get the green light, industry insiders say it will create “two big gorillas” in beauty: L’Oréal and then the Puig-Lauder configuration. One source likened it to Coca-Cola and Pepsi in the beverages industry or McDonald’s and Burger King in the burger wars. 

A combined Lauder-Puig business would have annual revenues of just over $20 billion, versus L’Oréal’s sales of 44.05 billion euros and Unilever‘s estimated turnover of about 23.90 billion euros in its beauty and personal care business.

“It comes very much from a defensive perspective, not an offensive perspective,” said a source, of the need for Lauder to better position itself in the industry’s upper echelons.

“When you think about what L’Oréal is doing in prestige fragrance and luxury fragrance, they’re just a behemoth, and then in retail distribution and travel retail, they have such power,” the source said. “So you have to have scale to compete against them. Otherwise, you’re going to end up with gondolas in the back of duty free.”

Although it’s by no means sure that the Estée Lauder-Puig deal will be completed, beauty experts are closely analyzing how other strategics can compete under any circumstance today.

“The first question is whether the deal happens. Lauder’s stock is down considerably,” one source said. 

Indeed, over the last four weeks Lauder’s stock is down around 32 percent, closing up 1.12 percent at $67.98 on Monday. On March 23, when the news was revealed, the stock ended down 7.7 percent and closed almost 10 percent lower at $71.48 the next day.

Lauder’s market cap is $24.28 billion, while Puig’s is 2.95 billion euros.

Lauder isn’t the only enterprise grappling with what the future holds. “There’s a bunch of other companies in the beauty space that are now figuring out if they need to make a big move,” said a source close to the industry. “That could either be because of this deal or, if the deal doesn’t happen, to partner with one of the parties that would have been a part of this deal,” the source continued, indicating that most likely other players could be waiting in the wings to initiate talks with either Lauder or Puig if their merger talks fall apart.

According to a note by Jefferies, the news of a possible Estée Lauder Cos.-Puig merger came following market speculation that the Estée Lauder Cos. could be an acquisition target for Unilever.

The British Group is in the process of spinning off its food business in a deal estimated at $33 billion to $35 billion, as it intensifies its focus on beauty, well-being and personal care under recently appointed chief executive officer of the company, Fernando Fernandez.

“Presumably, [it] would be a very aggressive beauty consolidator post that deal,” said the same source regarding Uliever’s food business spinoff. 

Unilever did not respond to request for comment.

“The interesting part would be if Unilever does separate from the food business, does it down the road actually acquire the combined Lauder and Puig?” another source speculated.

All of this comes at a time when the market has greater appetite for larger scale deals, despite Lauder’s falling stock price.

“What’s changed has been the public markets — how they treat larger scale, so that’s been a core driver,” said Fei-Fei Zhang, who leads J.P. Morgan’s North America beauty investment banking practice, speaking at the WWD LABeauty forum on Thursday. “The S&P 500 has tripled since 2019 and last year the U.S. premium for scale was 41 percent, so that’s not lost on all the players in the market — that you’re rewarded for your scale with higher premiums, better margins and easier access to capital.”

While Zhang still believes tuck-in acquisitions will continue to be the driving force behind the industry, some sources now think that unicorn deals — single brands trading for more than $1 billion — might not be enough anymore in the race for supremacy, unless they’re add-ons to an already huge strategic.

“There is a marketplace for medium-sized companies that have a platform, rather than being monobrand, being multibrand, multisector that creates value for the very large players like L’Oréal and Lauder,” another source said.

“Puig offers that. The monobrand M&A spate of transactions rise and fall on the strength of one brand,” the source continued. “So large companies are seeing that multibrand platforms that have a global reach and diversity of brand portfolios are an attractive target at this point and can create scale and EBIT.”

The source said that successful beauty companies, at whatever scale, need to respect product quality, effective brand-building and have digital-first strategies.

“There could be Asian companies, like AmorePacific, in the game,” they said. “Shiseido could decide to reorient their focus on fragrance through acquisitions, as well. The possibilities are endless.”

Others, however, don’t see Shiseido making any big transformations.

The source said when there’s a large strategic deal like L’Oréal-Kering or Estée Lauder-Puig, it’s important to analyze if the scaling maximizes the performance of the company and improves the brands they are buying.

“There’s always a question mark when there’s a smaller player absorbed by a larger player. Will the smaller player be swallowed up, and will the culture of that company be diluted?” he said. “That has happened in history, and that’s always dangerous. Corporate culture is a very intangible asset.”

All this comes at a time of flux for the top 10 biggest beauty players.

For both Unilever and Beiersdorf, there’s a question of whether their prestige and well-being divisions might or could be scaled to be 10 billion-euro businesses ultimately.

“There is a lot of white space for them,” another source said.

Currently, a large part of Unilever’s beauty division is mass, while prestige generates a much smaller share of the business. The group has a well-growing supplements portfolio, made of nutraceuticals, which is delivering well, too.

“Their positioning is much more inside-out beauty,” the source said. “It’s more the person as a whole — that’s their differentiating viewpoint.”

Beiersdorf’s prestige offering is one that will be closely watched. The source said: “Their foray into prestige needs more work.” Beiersdorf already had the likes of La Prairie and Chantecaille. “You’re either in or you’re out. Either you grow these brands and make them substantial with longevity, or you sell them. They are a good company,” the source continued. “Nivea is a huge brand in Europe, Asia, etc., but they need to focus more on what they want to build for the long term.”

Procter & Gamble, meanwhile, which sold some of its beauty holdings to Coty but still has mega personal care brands such as Olay, Head & Shoulders and Pantene, as well as SK-II, isn’t expected to be reactionary.

Freddy Bharucha, formerly president, global personal care, was appointed CEO, P&G Beauty, at the end of last year, taking the reins from Alex Keith.

One source said: “I don’t know if P&G has the stomach to do a big beauty deal. P&G is such a behemoth, they never really need to do anything, but everybody should feel like they need to do something.”

Then you have a lot of small players, like Coty Inc., which is now not even $3 billion in market cap anymore.

“It’s a tough one, because it’s been an amalgamation of different assets, mostly weak assets, and three or four different cultures that never really melted [together],” another source said of the struggling company. “My bet on this is probably it will have to be sold in parts. I don’t see it as a viable strategic option for a company going forward.”

In September, Coty revealed that it’s started a strategic review of its mass color cosmetics business and its operations in Brazil, assessing a full range of alternatives including partnerships, divestitures and spin-offs. This is understood to still be underway.

And while LVMH Moët Hennessy Louis Vuitton is not a strategic beauty player, it has a primary focus on fashion and the “maisons” of each brand, as well as Sephora, a source said.

“If there are brands that don’t have a ‘maison,’ personally, my view is that they’re going to sell it at some point,” the source said. “There is a rationale to it.”

According to various media reports, LVMH is currently weighing up the sale of Make Up Forever and Fenty Beauty.

As for Chanel, the sixth largest player in beauty, it isn’t thought to be looking to scale. “I’m not sure beauty is their number-one priority,” the same source said.

But for now, much of the future beauty landscape will depend on if the Lauder-Puig deal even goes through.

“It’s a big dilution of effort at a time that concentrating on fixing what doesn’t work is very important,” one source said.