Colgate Doubles Down On Premium Skin Care With $1.7bn Filorga Acquisition
Executive Summary
Back in April, CEO Noel Wallace noted Colgate’s interest in further skin-care M&A during his first quarterly presentation at the firm’s helm. The Filorga purchase is significantly bigger than 2018 deals that whet Colgate’s appetite for high-growth, high-margin skin care and represents a gateway to the fast-growing travel retail channel.
The Colgate-Palmolive Co. continues to grow its personal-care business with premium skin-care additions, announcing its acquisition of France-based Filorga for $1.69bn.
“Filorga is a strong, premium-priced brand with distinctive positioning that fits well within our long-term personal-care growth strategy,” notes President and CEO Noel Wallace in the firm’s 11 July release.
Colgate expanded into professional skin care in early 2018 by picking up PCA Skin and EltaMD through separate transactions reportedly totaling $730m. (Also see "Colgate Enters Pro Skin-Care Market With PCA Skin, EltaMD Buys" - HBW Insight, 18 Dec, 2017.)
Wallace, who succeeded Ian Cook at Colgate’s helm in April, signaled during his first quarterly presentation that further skin-care M&A could be in sight, while noting the firm’s intention to “dial up” investments behind PCA Skin and EltaMD. (Also see "Colgate’s Prestige Skin-Care Acquisitions Inspire Interest In Similar Deals" - HBW Insight, 28 Apr, 2019.)
“This acquisition also provides Colgate entry into the fast-growing and sizeable travel retail channel, particularly in Asia.” – CEO Noel Wallace
According to its website, Laboratoires Filorga was founded in 1978 as “the 1st French aesthetic medicine laboratory,” committed to developing and producing hyaluronic acid-based injectable products for use by physicians, “long before the phenomenal success of Botox.”
The company began marketing cosmetics to consumers in 2007. Its Filorga brand, which specializes in anti-aging facial care, now comprises more than 50 products with a presence in more than 70 countries, the firm says.
Laboratoires Filorga’s aesthetic medicine branch became FILL MED in 2018.
While it is not included in the deal with Colgate, the medical business’s legacy lives on in the Filorga cosmetics brand, whose formulas feature NCEF, an encapsulated compound “for profound skin penetration” that evolved from an anti-aging solution developed for clinical use, the company says.
Virtually all of Filorga’s offerings “share the same principle: to combine optimal and clinically proven effectiveness visible in 7 days with sensorial textures and premium packaging,” according to the brand’s website.
Best-selling items include Meso-Mask Anti-Wrinkle Lightening Mask ($59), Optim-Eyes Eye Contour Cream ($49) and Time-Filler Absolute Wrinkle Correction Cream ($89).
Colgate notes that Filorga leverages a multichannel distribution strategy that encompasses pharmacy, online and specialty retail.
“This acquisition also provides Colgate entry into the fast-growing and sizeable travel retail channel, particularly in Asia,” Wallace notes.
Travel retail has been a leading growth driver of late for beauty multinationals including L'Oreal SA and the [Estee Lauder Companies Inc.] (Also see "Estee Lauder Says Expected Q3 China Slowdown Didn’t Happen; More Financial News In Brief" - HBW Insight, 14 May, 2019.)
Analysts Give Deal Thumbs Up
Analysts generally see the Filorga acquistion as a sound strategic move by Colgate, which has been upping its focus on higher-growth, more profitable opportunities to drive overall business improvements.
The firm’s net sales were roughly flat in reported and organic terms in fiscal 2018. (Also see "Colgate Guidance Rides Price Increases, Earnings Outlook Dips On Higher Costs" - HBW Insight, 27 Jan, 2019.)
In its fiscal 2019 first quarter, announced in April, Colgate’s total sales were down 3%, reported, compared with the prior-year period, but increased by the same amount on an organic basis. Net income declined 11.7% due largely to higher raw material and packaging costs, the company said.
Deutsche Bank analyst Steve Powers suggests in an 11 July note that the Filorga acquisition “symbolizes CL’s willingness to take on slightly bigger risks (for bigger rewards) under new CEO Noel Wallace (which we generally applaud), as well as perhaps an acknowledgement by CL that it needs to more aggressively reshape its portfolio to accelerate growth (with which we would concur).”
Growth opportunities for Filorga could be found in Greater China, where the brand debuted as recently as 2016, and the US, where Filorga appears to have launched just this year through selected retailers, according to Powers.
Based on his sources, Filorga is on track to generate revenue of roughly €325m ($366m) in 2019, compared with approximately €240m in 2018 and €150m in 2017. “We must assume that recent growth has been fueled by China/travel retail and (in 2019) by US expansion,” he says.
Jefferies analyst Kevin Grundy estimates that with the Filorga deal, Colgate’s personal-care segment – which includes such brands as Softsoap, Irish Spring, Speed Stick and Sanex, purchased in 2011 for some $940m – now will account for 28% of the firm’s overall business, up from 18% in fiscal 2016. (Also see "With Sanex Buy, Colgate Boosts Its Personal-Care Game In Europe" - HBW Insight, 28 Mar, 2011.)
The balance will be made up of oral care (42%), home care (16%) and pet nutrition (14%), he says.
Morningstar’s Erin Lash states, “Although we've been encouraged by Colgate’s recent investments in its internal innovation cycle (which have enabled the firm to bring products to market in just 6-12 months, down from 18-36 months historically), we believe that adding niche operators like Filorga, which have proved more agile in responding to evolving consumer trends, could accelerate these efforts.”
Colgate expects the Filorga transaction to close in the 2019 third quarter.