Last week, L’Oréal (PINK:LRLCY) announced its plans to acquire Chinese facial mask products manufacturer Magic Holdings for HK$6.54 billion (approximately $850 million). The takeover bid from L’Oréal has been backed by six key stakeholders representing 62.3% of Magic Holdings equity and is supported by the company’s Board of Directors.  The announcement is preceded by the acquisition of the health and beauty divisions of Interconsumer Products Limited (ICP) in Kenya in April 2013.  New Markets contributed 40% to L’Oreal’s total sales in 2012, and given their growth potential, continue to have higher priority over mature markets of Europe and North America.
Higher prices, however, have been a critical factor in limiting L’Oréal’s traction in new markets where it competes with lower-priced hair and skin care products of consumer giants Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL). Like many other players in the beauty products industry, L’Oréal has embarked on a two-pronged strategy to boost top line by expanding footprint in high growth markets and lower costs through efficient operations. A wider presence in India, South East Asia and entry into markets in sub-Saharan Africa is expected to reduce L’Oréal’s dependency on mature consumer markets and help the company approach FY 2013 on a stronger footing.
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L’Oréal’s Newest Bid: Is Magic Holdings Value Additive?
Magic Holdings’ is a Chinese manufacturer of facial mask products. The company has been made a takeover bid of approximately $850 million from L’Oréal on August 12, 2013. Revenues for Magic Holdings stood at HK$ 1.35 billion ($174.1 million) in 2012, growing by 41% over 2011. The company reports that the facial mask industry in China is expected to be growing at 29% y-o-y. Rising pollution in large Chinese cities is the main factor supporting the high growth rate for the industry.  The market share for the company has grown to 18.5%, ranking it at the top for the third year. We estimate the Chinese facial mask industry to be worth approximately $950 million in the $15 billion Chinese skin care industry. We have computed this market size by dividing Magic Holdings’ revenues by its market share. ($174.1 million/18.5% = $941 million = ~950 million)
The acquisition of Magic Holdings would provide further rapport for skin care division of L’Oréal China with strong growth potential in the facial masks industry.  L’Oréal is the market leader in beauty products in China with a market share of 17%. The acquisition can help L’Oréal expand its customer base through new product lines, thereby extending its lead over other players.
Increasing Focus on Emerging Economies to Drive Growth
L’Oréal’s new markets constituting Asia Pacific, Africa, Latin America and the Middle East have shown strong growth momentum in 2012. Like-for-like sales from the region grew at 9.2% over 2011. New investments and acquisitions into the region have been supported by optimism of further growth with the management pursuing double-digit growth. The company expects India to be among its biggest markets by 2020 and has plans to quadruple its turnover in India by 2020.  In January 2013, L’Oréal decided to raise the stakes with plans to invest about $176 million by 2016 in India. 
While the Indian economy slowed down from 10% to 5.5% in 2012, L’Oréal’s sales grew 25% in 2012. Two research centers have been unveiled to help develop products that are more locally relevant to the Indian consumer. Similar investments such as the Jababeka plant for cosmetics in Indonesia in November 2012 and San Luis Potesi for hair color products in Mexico in December 2012 have provided opportunities to reduce production and export costs and increase development of locally relevant products. 
Likewise, like-for-like sales in the Middle East and Africa have grown at 14.7% over 2011. A new plant in Egypt is expected to be under operation in 2013, catering to the increased demand from Middle East and Africa.  In the next five years, the beauty products market in Middle East and Africa is expected to reach $7 billion, growing 35% annually and L’Oréal’s investments in Kenya, Nigeria, Ghana and Egypt is expected to support its organic growth.  However, the lack of retail infrastructure in these economies can pose challenges in tapping into the potential behind sub-Saharan economies.
Constant investments to foster growth in the new markets would be instrumental for the company in attaining its target of $1 billion new customers in the next 10 years.
We will be revising our Trefis price estimate of $28 for L’Oreal after the company releases the detailed earnings report on August 29.Notes:
- L’Oréal announces proposal to acquire Magic Holdings in China, L’Oréal Investor Relations, August 2013 [↩]
- L’Oréal acquires beauty firm Interconsumer Products in Kenya, L’Oréal Investor Relations, April 2013 [↩]
- 2011/2012 Annual Report, Magic Holdings International Limited [↩]
- Skin care in China, Euromonitor Report, April 2013 [↩]
- L’Oréal bets Rs 1,000 cr on India, DNA India, January 2013 [↩]
- L’Oreal Plans to Invest $176 Million in India, The Wall Street Journal, January 2012 [↩]
- L’Oréal’s CEO Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, February 2013 [↩] [↩]
- L’Oréal expands into four African countries as demand grows, BDLive, August 2013 [↩]