ThinkingLinking, the cross-border M&A firm that applies predictive analytics to investors, has released its report based on a 5-year study of global consolidating among cosmetic ingredients producers. The report shows rationalization of the fragmented global map through 50 deals worth over €3 billion.
The sector covers the critical ingredients used by the €200 billion global cosmetics and perfume sector. Ingredients cover such raw materials as essential oils, natural extracts, fragrances and chemical ingredients.
In the 5-year period from 2012 to 2016, 50 acquisitions in cosmetic ingredients businesses have transformed the sector from a diverse market of niche producers of individual ingredients in individual countries into an industry of multi-ingredient-multi-country providers. In total, 45 acquirers were involved.
This is a rationalization of both map and ‘menu’. There are no signs that the trend is set to stop.
What’s it worth?
Investment values were disclosed for about half of the deals (22). These were worth €2.3bn ($2.5bn). ThinkingLinking estimated the total value of all 50 deals at over €3bn ($3.2bn).
2012 and 2013 were slightly more active years in number of deals. Since then the picture has been stable, with around 10 deals a year and shows no signs of abating. The investors came from 16 countries and went into 20.
Approximately half of the deals (28) were cross-border. Not surprisingly given the origin of the sector, Europe saw the greatest focus – both as the source of the investor and for the location of the target. Emerging investors have appeared from the Middle East and increasingly from Asia.
A variety of deal structures were employed. Slightly more than half the deals (28) were 100% acquisitions, and 14 deals involved the original owners keeping an ongoing equity stake, while the structure of the remaining 8 deals wasn’t disclosed.
The 45 investors include many new faces not seen before. They had previously been happy with organic growth but have now joined in the consolidation game.
Although ‘usual suspects’ were behind many of the €100m deals, the investors in the €10-100m deal range were mostly well-funded mid-sized businesses making their first acquisition.
Mark Dixon, the firm’s Chief Thinking Officer, said “Ingredients are being concentrated into fewer hands by companies with the confidence and commitment to pay high prices to play in a fast-changing world.”
“Our selling clients see challenges while buyers see opportunities in emerging market demographics and what I like to call the track-and-trace-field-to-face trend.”
What’s the thinking behind the linking?
The investors fall into three main groups: financial investors, ‘core’ buyers from the cosmetic ingredients sector, and horizontal moves such as by food, beverages or pharmaceuticals ingredients producers entering cosmetic ingredients for the first time. The core investors are by far the most active. They are in effect rationalizing a sector that has traditionally been restricted by ingredients and geography. ThinkingLinking has analysed the thinking behind the deals.
Gap-filling for customers’ demands: M&A allows companies to add new products demanded by customers such as natural, organic and active ingredients to their portfolios, satisfying customers and growing revenues.
Gap-filling to cross-sell:A broader customer base allows buyers to cross-sell existing products, break into long-term customer relationships hitherto controlled by mid-market producers, as well as benefit by combining both companies’ distribution channels.
Know-how: Acquisitions can provide the research and R&D needed to keep innovating and keep up with the innovating needs of customers.
Market entry: M&A enables buyers to enter new geographical markets that are large or fast-growing. Buyers aiming to expand global footprint through export or setting up production can face barriers and high costs in markets with stringent regulations and high safety standards.
Global sourcing: Some natural ingredients can only be sourced from specific geographical areas and an acquisition is sometimes the best way either to control the source or expand sourcing where there is a lack of capacity to meet customer demand.
Procurement pressure: Some cosmetics companies are concentrating procurement in fewer, larger producers. The top four players already have more than half of the market.
Negotiating power: An acquisition can increase negotiating power vis-à-vis mid-market customers and suppliers.
Cost synergies: A combination can reduce R&D, admin and other costs, though this often takes a while on the R&D side.
Multiple sector sale channels: Many ingredients can be sold to more than one of the cosmetics, pharmaceutical, food and beverage channels, meaning the horizontal move can boost sales in both the acquirer’s and target’s ingredients.
Barriers to entry: Regulatory requirements and a research-intensive environment make it hard for companies to enter cosmetic ingredients organically for the first time without suffering heavy costs and delay.
Some private equity firms are buying in the hope of consolidating cosmetic ingredients businesses through further acquisitions in the sector while others enter cosmetics ingredients as the first step to horizontal deals such as food and beverages ingredients.
Sellers’ point of view
Competitive environment: Many of the same reasons favouring core acquirers are pressuring sellers to give up their businesses if they are not willing or able to expand themselves. Even if they remain very profitable, by ‘standing still’ they won’t see the growth they’ve enjoyed in past years.
Change of focus: a shift in focus by mid-to-large players can result in a cosmetic ingredients spin-off.
The report, entitled ‘Alchemists go shopping’, can be viewed at thinkinglinking.com.