BeautyMatter: Q3 2019 – Beauty Deals

After years of speculation, Drunk Elephant has been acquired. While it is less than the billion-dollar price tag that had been floated, Shiseido’s acquisition of the brand is still one of the largest deals of the year, second only to L’Occitane’s purchase of Elemis for $900 million in January.

Who: Drunk Elephant was founded in 2012 by Tiffany Masterson as a cross-generational brand for all skin types, and has since experienced strong growth among Gen Z and millennials. Its products use biocompatible ingredients that directly benefit the skin’s health, noted Shiseido, which highlighted Drunk Elephant’s “effective products, unique and playful brand voice, and strong community engagement.”

Shiseido Americas Corporation is a subsidiary of Tokyo-based Shiseido Company, Limited. Shiseido Americas’ portfolio of prestige beauty brands includes Shiseido, NARS, Clé de Peau Beauté, bareMinerals, Laura Mercier, and several prestige fragrance brands including Issey Miyake, Narciso Rodriguez, and Dolce & Gabbana. In 2017, Shiseido Americas acquired MATCHCo, a technology company, JWALK, a creative agency, and Giaran.

Why: The move is the latest step in Shiseido’s push to become a bigger player with a more global footprint. The acquisition is part of Shiseido’s Vision 2020 goal, first announced in 2014 to expand the company by growing new brands, removing silos between teams, and devoting resources to e-commerce.

In their own words: Shiseido President and CEO Masahiko Uotani said: “We are thrilled to announce the acquisition of Drunk Elephant, one of the fastest-growing prestige skincare brands in history. This transaction is squarely aligned with Shiseido’s Vision 2020 goal of accelerating growth and creating value through strategic partnerships. Drunk Elephant’s approach strongly resonates with its highly engaged and loyal consumers, who value the integrity and effectiveness of Drunk Elephant’s formulations combined with a fun, curious approach. I am confident that under Marc Rey’s leadership in the Americas and Shiseido’s global platform and unique resources, we will strongly support Drunk Elephant on its ongoing growth trajectory. I am very pleased to welcome Tiffany and the Drunk Elephant team to the Shiseido Family and together, pursue our long term mission of ‘Beauty Innovations for a Better World.’”

Marc Rey, CEO Shiseido Americas, said: “This new and incredibly exciting partnership builds on Shiseido’s significant momentum and successful track record of acquiring distinctive, best-in-class brands. Drunk Elephant is changing the way people understand and experience beauty by offering products that are effective and clean-compatible. Drunk Elephant is built on a strong brand foundation and a philosophy that fits perfectly with Shiseido’s values and skincare heritage. Our innovative and people-first cultures are well aligned, and we share an unwavering commitment to our consumers. I also believe the brand will contribute to the business performance of Shiseido Americas.”

Tiffany Masterson said: “I started this business as an industry outsider, and from the beginning, I did things a little differently. To join with a powerhouse beauty company such as Shiseido that leads the industry in innovation and global excellence is a dream come true for me and for Drunk Elephant. We share similar values, most importantly an unwavering commitment to the consumer. I chose a partner who will let the brand continue to be itself, with the same formulations and the same team.”

Details:

• Shiseido acquired a 100% stake in the Drunk Elephant business for $845 million.
• The purchase price is said to be more eight-times 2018 sales, and more than 20 times earnings before interest, taxes, depreciation and amortization.
• According to The Moodie Davitt Report, Drunk Elephant had consolidated sales of US$75 million in the year ended 31 December 2018, with projected sales of US$125 million in 2019.
• According to Tribe Dynamics, Drunk Elephant grew its EMV 272% from 2017 to 2018. From January to August 2019, the brand collected $34.6M EMV, a 102% EMV increase from January to August 2018. In comparison, over the same period the Tribe Dynamics’ Skincare EMV Index—a portfolio of 100 top-earning skincare brands—grew just 9%.
• In the spring of 2017, there were rumors of a sale to Estée Lauder. Ultimately the brand took investment from VMG Partners and Man Repeller’s Leandra Medine. At the time of the investment, the brand was said to have sales of between $25 million and $30 million at retail in 2016, with revenues tracking to double in 2017.
• Early on, Masterson received $300,000 seed funding from her brother-in-law, and her brother also invested an undisclosed amount and became president.
• Upon closing, Drunk Elephant will operate within Shiseido Americas.
• Founding Partner and Chief Creative Officer Tiffany Masterson will continue in her role as Chief Creative Officer and assume the additional role of President, reporting to Shiseido Americas CEO and Chief Growth Officer Marc Rey.
• The transaction was led by Shiseido Americas and the New York-based Shiseido Global M&A team, in coordination with the Shiseido Company.
• Jefferies LLC acted as a financial advisor to Shiseido Americas, and Jones Day served as Shiseido Americas’ legal counsel.
• Financo and Moelis & Company, LLC, served as Drunk Elephant’s financial advisors and Sidley Austin LLP as legal counsel.

Industry sources say General Atlantic has taken a 60% stake in Morphe Cosmetics at a $2.2 billion valuation. General Atlantic will partner with Morphe Holdings’ management, its founders, and existing investor Summit Partners to lead the company’s next phase of growth with the development of a global beauty platform focused on building a portfolio of next-generation, digitally led beauty brands.

Who: Founded as a professional makeup brush company in Los Angeles in 2008 by Chris and Linda Tawil, Morphe has grown into a global beauty brand with a highly engaged and loyal base of customers. Over the past decade, Morphe has expanded its category mix and developed an innovative, influencer-led platform. Morphe’s differentiated offering has earned it a strong following with today’s digitally focused consumer and enabled the company to capture a share of the global beauty market.

General Atlantic is a leading global growth equity firm providing capital and strategic support for growth companies. Established in 1980, General Atlantic combines a collaborative global approach, sector-specific expertise, a long-term investment horizon, and a deep understanding of growth drivers to partner with great entrepreneurs and management teams to build exceptional businesses worldwide. This is General Atlantic’s third significant investment in beauty and beauty services in the past four years, along with Too Faced, in which the firm sold its stake to Estée Lauder in 2016, and European Wax Center, in which the firm invested in 2018.

Founded in 1984, Summit Partners is a global alternative investment firm that is currently managing more than $19 billion in capital dedicated to growth equity, fixed income, and public equity opportunities. Summit invests across growth sectors of the economy and has invested in more than 500 companies in ecommerce, technology, healthcare, and other growth industries. These companies have completed more than 140 public equity offerings, and more than 190 have been acquired through strategic mergers and sales.

Why: General Atlantic will act as a strategic partner to Morphe Holdings in helping fuel the Morphe brand’s continued global expansion. The investment will also accelerate the company’s next phase of growth as the platform of choice for emerging artists, talented creators, and next-generation beauty brands.

In their own words: “We are proud of what we have achieved through the success of Morphe Holdings and our marquee brand Morphe,” said Myles McCormick, Chief Executive Officer of Morphe Holdings. “General Atlantic’s investment will position us for our next phase of growth as we continue to grow Morphe and expand to develop a new global platform with a portfolio of next-generation beauty brands.”

Mr. McCormick continued, “With its experience in partnering with founder-led brands, General Atlantic will enable us to leverage additional resources and expertise for founders in the future as we seek to grow our portfolio and help next-generation beauty brands rapidly scale their businesses.”

“Morphe Holdings, underpinned by the strength of the Morphe brand, has developed a unique approach that truly resonates with its customer base,” said Andrew Crawford, Managing Director and Global Head of General Atlantic’s Consumer sector. “We see considerable opportunity to leverage this approach into creating a differentiated portfolio of brands and scaling it across channels, geographies and categories.”

Andrew Ferrer, Managing Director at General Atlantic who leads the firm’s beauty investing, added, “We have known Morphe Holdings’ industry-leading management team for years and closely followed the company’s growth. We are thrilled to be partnering with Myles and the team to continue the company’s existing momentum and help build Morphe Holdings into a global beauty platform.”

General Atlantic has extensive expertise in geographic and digital expansion of its portfolio companies. This is General Atlantic’s third significant investment in beauty and beauty services in the past four years, along with Too Faced, in which the firm sold its stake to Estée Lauder in 2016, and European Wax Center, in which the firm invested in 2018.

Details:

• Morphe Holdings and General Atlantic formed a new partnership in which General Atlantic will acquire a majority stake in the company alongside existing investor Summit Partners and co-founders Chris and Linda Tawil. Additional terms of the deal were not disclosed.
• According to WWD, industry sources say the private equity firm is said to have taken a 60% stake in the business at a $2.2 billion valuation.
• Morphe is said to be on track to do nearly $500 million in net sales for 2019, with about $130 million in earnings before interest, taxes, depreciation, and amortization.
• Siblings Linda and Chris Tawil bought the company in 2008 when it was a trade show-based brush operation, and gradually built it out into a full-fledged beauty brand.
• Elevate Brand Partners, which is backed by private equity firm Summit Partners, invested in 2017.
• Morphe Holdings’ existing management team, led by CEO Myles McCormick, will remain at the helm of the company.
• In conjunction with General Atlantic’s investment, Andrew Crawford and Andrew Ferrer will also join the Board of Directors alongside existing investor Summit Partners. Additionally, Morphe founders Chris and Linda Tawil will remain on the board and be heavily involved in the brand.
• All existing Morphe Holdings shareholders will retain ownership in the company.
• Jefferies acted as Exclusive Financial Advisor to Morphe Holdings. In addition, Jefferies led the financing of the transaction.
• Morphe Holdings was also advised by Kirkland & Ellis LLP.
• General Atlantic was advised by Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Summer Fridays, the indie influencer brand that took Sephora by storm last year, has received investment from Prelude Growth Partners.

Who: Summer Fridays was launched in 2018 by influencers Marianna Hewitt and Lauren Gores Ireland in 2018 with one hero product, Jet Lag Mask, a Sephora exclusive. The brand has added two additional masks to the range, Overtime Mask and R+R Mask, as well as distribution partners Cult Beauty, Selfridges, and Mecca.

Prelude Growth Partners was formed in 2018 by Alicia Sontag and Neda Daneshzadeh to invest in consumer companies. Sontag was formerly Global President of Beauty at Johnson & Johnson and had spent more than a decade at the Estée Lauder Cos. Inc., while Daneshzadeh was a partner at L Catterton. Prelude makes growth capital and value-added operating support to fast-growing, high-potential consumer brands. The firm looks to make investments of $5 million to $15 million in companies across branded consumer categories such as beauty, personal care, health & wellness, food, beverage, and pet, among others. Their portfolio includes 8 Greens and Westman Atelier.

Why: The capital is earmarked to build out the company’s team, new product development, expand international expansion, and expand marketing efforts.

In their own words: “There’s been magic in building something using a nontraditional roadmap,” Gores said to WWD. “Marianna and I obviously don’t come from traditional beauty backgrounds, so we wanted partners who could guide us in those areas that we’re really unfamiliar with, while also pushing us to maintain our approach in using our intuition [and] using our ability to really ask our community what they want from the brand.”

“We were so fortunate to be able to launch with Sephora before we had even launched the brand, but the moment you go into such a large retailer you have to function like a large company very quickly,” Hewitt said to WWD. As a not-so-large company, she and Gores would call on Prelude for guidance, and eventually decided to take an investment in order to capitalize on the brand’s momentum.

Details:

• Summer Friday receives investment from Prelude Growth Partners.
• Terms of the investment were not disclosed.
• According to WWD, the business is on track to do $20 million in retail sales for 2019.