L’Oreal (PINK:LRLCY) is the largest manufacturer of cosmetics and beauty care products in the world. You can buy L’Oreal products from mass-volume retailers, department stores, pharmacies, perfumeries, company-owned stores and even e-commerce websites, but there is no L’Oreal salesman or saleswoman ringing your doorbell or hosting parties to sell skin crèmes and cosmetics. It’s Avon (NYSE: AVP) that does that. Apart from Avon, L’Oreal competes with other leading players such as Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Estee Lauder (NYSE:EL).
We value L’Oreal with a $23.27 Trefis price estimate of its stock, which is slightly below its current market price.
Through its 27 global brands such as Garnier, Maybelline, Biotherm, Vichy and The Body Shop, L’Oreal caters to consumers of varying income levels and ethnic backgrounds. But where L’Oreal still misses out is from direct selling which Avon Products champions, which could make it an attractive acquisition target for L’Oreal. Here we explore why L’Oreal could pursue the acquisition of Avon at some point in the future.
Scope for Further Expansion in Emerging Markets
Avon is the largest direct selling organization in the world with a standing sales force of over 6.4 million active sales representatives spread across the globe. Avon drew over 40% of its $10.9 billion worth of sales in 2010 from Latin America where consumers are accustomed to buying beauty care products from door-to-door sellers. Direct selling is particularly suited for penetrating deeper into emerging markets that have huge populations and ample room for growth and market share gains.
Healthy Cash Position at L’Oreal
L’Oreal is sitting on abundant cash. It has a 9% stake in France’s biggest drug maker, Sanofi Aventis, with a market capitalization of about 69 billion euros, which L’Oreal is willing to liquidate to make way for an acquisition. Separately, L’Oreal has a $1.55 billion cash pile and is believed to have the capacity to shell out as much as 20 billion euros on acquisitions .
Non-Beauty Related Products Could Be Discontinued
Avon not only sells beauty products including bath and shower gels but also non-beauty related products such as fashion jewelry, watches, footwear, gift items, housewares and even nutritional supplements, which are out of L’Oreal’s scope of business. Avon’s ready sales force and its portfolio of beauty products could be an interesting addition to the L’Oreal portfolio.
Beauty products make up less than 73% of Avon’s stock. We value Avon with a $31 Trefis price estimate of its stock, which is roughly in line with the current market price.
At the current $13 billion market capitalization, beauty products make up close to $11 billion and make for a comfortable purchase by L’Oreal. As the departing L’Oreal Chairwoman Lindsay Owen Jones was vehemently against direct selling, there is some chance that her successor Jean-Paul Agon would reconsider this model.Notes:
- L’Oreal Chairman Agon Says He Sees No Synergies With Nestle, Bloomberg, April 26, 2011 [↩]