Potential Privatization – 30% Upside
This is a pretty interesting potential privatization setup unfolding in the beauty and skincare industry. L’Occitane International is a prominent multi-brand beauty and skincare company with a balanced geographical presence across the globe – Asia/Pacific (42% of sales), the Americas (33%), and EMEA (26%). Reports from media outlets suggest that L’Occitane’s controlling shareholder and chairman Reinold Geiger (with a 73% stake) is in advanced talks to take the company private and reportedly has the financing lined up. L’Occitane has recently confirmed that Geiger is indeed considering a potential transaction. The company has also set a floor price saying that the “potential offer price would be no less than HK$26.00 per Share”. Meanwhile, media reports have speculated the upper range at HK$35/share. The stock is now trading at around HK$27/share. Assuming the bid will eventually come through, the situation offers a seemingly low-risk bet on the offer coming closer to the media’s rumored ‘upper-range’ price. Several arguments suggest the offer is indeed likely to materialize. However, if the negotiations fail, the downside to the pre-rumor levels is around 25%.
L’Occitane seems undervalued, which might be primarily explained by the company’s low float and Hong Kong listing. Privatization presents a compelling rationale for Geiger and would allow him to relist the company at a later stage in Europe where industry peers command significantly higher valuations. Unsurprisingly, recent media reports have highlighted Geiger’s engagement with advisors to explore the feasibility of relisting the company in the future.
Currently, L’Occitane trades at a significant discount to its US/Europe-listed peers, such as Estee Lauder (EL) and L’Oréal (LRLCY, or French listing OR-PA). L’Occitane is valued 11.6x TTM EBITDA versus EL and LRLCY at 26.0x and 23.1x TTM EBITDA respectively. Despite the difference in size, these peers display comparable EBITDA margins (20% and 24% versus 22% for L’Occitane) and similar revenue growth rates (8% for both peers versus 6% for L’Occitane during FY17 to FY22). Both EL and LTLCY also have similar regional exposure to L’Occitane.
The other US-listed comps COTY and IPAR command valuations of 14.9x and 16.9x TTM EBITDA respectively. However, both peers have slightly lower EBITDA margins (18% and 21% respectively) and possess limited to no exposure to the Asian market.
A privatization offer closer to the rumored HK$35/share would value L’Occitane at 14.5x TTM EBITDA. So it seems reasonable to expect it somewhere around these levels.
The timing of the potential privatization would be quite opportunistic and come amidst a very successful portfolio transformation for the company. Since 2018, L’Occitane has been undergoing a strategic turnaround with a primary focus on repositioning its flagship brand L’Occitane en Provence as well as pursuing acquisitions of higher-margin product lines, including Elemis (2019) and Sol de Janeiro (2021). L’Occitane’s revenue has already increased significantly from €1.4bn in FY19 (fiscal year ending in March) to €2.1bn in FY23. This was in large part fueled by Sol de Janeiro, for which the revenues have exploded from €60m in 2020 to €$267m in FY23. Further revenue growth is anticipated to come from the launch of Sol de Janeiro in Asian markets (L’Occitane’s main geographic segment) next year, the reintroduction of Elemis in China, and continued focus on higher-value product categories. A more in-depth insight into L’Occitane’s business turnaround can be found in this VIC write-up (free guest account required).
Current HK takeover rules also provide substantial incentives for Geiger not to lowball the offer. The privatization would be subject to standard HK takeover conditions – approval from 75% of disinterested shareholders and not more than 10% of disinterested shareholders blocking the transaction. Thus, excluding the existing 73% ownership by Geiger, the blocking stake would amount to just 2.7% of all outstanding shares. The largest minority shareholder Acatis KVG, a Germany-based fund manager with €12 billion in AUM, has a 7% stake.
Ronald Geiger is an Austrian billionaire with an estimated net worth of around $2.3 billion. Geiger appears to have a solid reputation given that he has successfully steered L’Occitane over the recent decades, with the company’s revenues multiplying 3x since 2010). Additional information about Geiger and his history with L’Occitane can be found in this Forbes article.
Hong Kong-listed skincare specialist L’Occitane International SA (0973.HK) said on Monday its controlling shareholder had decided against a potential deal to take the company private, curbing speculation of a possible European listing.
Ugh – now what?
Unfortunate development. Based on WSJ’s speculation, it seems that Geiger was not willing to bid as high as the minority shareholders would have liked. As far as I’m concerned, the sale thesis has failed, so it’s time to move on.
https://www.wsj.com/finance/investing/loccitanes-controlling-shareholder-decides-against-takeover-offer-9e26460d?siteid=yhoof2
https://www.clarksquarecapital.com/p/loccitane-international-sa-hk-973
I believe the stock is compelling for the following reasons:
The near-term stock setup has been derisked due to the lowered margin guide for FY24 and the consequent failed take-private attempt.
L’Occitane’s top line will continue to grow at least double digits due to Sol de Janeiro, which is growing triple digits and shows no signs of slowing down.
A recovery in Elemis + L’Occitane provides further upside to top-line growth. I model a mid-teens rate over the next two years.
I expect L’Occitane’s EBIT margin to revert above 15% by FY25.
The low absolute and relative valuation makes the risk/reward compelling. The downside is likely capped by a takeover or a re-listing.
I see a pathway for the shares to be worth at least HKD 40 in a year or roughly double today’s price.
Several interesting write-ups on L’Occitane have been published recently in the public domain. These are well worth reading for those following the company.
Michael Fritzell from Asian Century Stocks has highlighted company’s improved performance since 2018, driven by successful acquisitions of fast-growing Sol de Janeiro and Elemis brands. Company’s FY23 were lower due to impairment charges related to pre-2019 acquisitions, the shutdown of Russian operations and China’s zero-Covid policy. However, these challenges now appear to be in the rearview mirror. Assuming L’Occitane can achieve its long-term operating margin target of 16%, the stock is currently trading at a FY2026E P/E of only 11.8x. This compares to global peers trading at approximately twice this multiple.
Another pitch on L’Occitane was recently posted on Clark Square Capital’s Ultimate Value blog. Clark Square Capital noted the significant selling pressure L’Occitane has experienced in recent months due to the lowered FY24 margin guidance – it self mostly a result of a one-off marketing expense and a failed take-private attempt by the chairman. These events have created an attractive entry point. Similarly to Michael, Clark Square Capital expects L’Occitane’s EBIT margin to revert back above 15% in FY25, fueled primarily by the explosive growth of Sol de Janeiro. Assuming margins revert to these levels, the stock is currently trading at only 10x estimated FY25 earnings, compared to L’Occitane’s historical average multiple of 20x. Potential catalysts include another chairman’s attempt to acquire the company or management pursuing a re-listing on another exchange.
L’Occitane is back in play again: just months after abandoning privatization talks, the controlling shareholder Reinold Geiger (73%) might be preparing for another attempt to buyout the company. This time, the private equity giant Blackstone is reportedly conducting due diligence and even mulling a joint bid with Geiger.
With the backdrop of these media rumors, one activist shareholder Butler Hall Capital (owns 1.5m shares) sent a letter to the board asking to reject any offer below HK$45/share (vs HK$28/share current price). The activist also emphasized the benefits of uplisting in the US market and pushed for the potential spin-off of Sol De Janeiro. Butler Hall believes that Sol De Janeiro alone could be worth HK$32-$41/share, when valued in line with a US-listed peer ELF that has a slower growth profile and lower margins.
A quick reminder: several months ago, when Geiger was considering the privatization, the rumored takeover price was HK$35/share (yet the stock traded under HK$30/share).
The discount to L’Occitane’s other US/European peers also remains wide. A part of this could be explained by the company’s low float and Hong Kong listing. The privatization thesis essentially remains unchanged – relisting the company in US or Europe at a later stage would likely generate a substantial ROI for the buyers.
Operationally L’Occitane continues to execute on all fronts, especially with the Sol De Janeiro brand, which is growing at triple digits. According to the activist, there are quite a few new levers for L’Occitane to pull for the growth to continue at a high clip.
Bloomberg report: https://www.bloomberg.com/news/articles/2024-02-05/blackstone-said-to-consider-bid-for-skin-care-company-l-occitane?embedded-checkout=true
Activist letter: https://ml.globenewswire.com/Resource/Download/edbd29a5-02a9-4aa2-a371-6ea58d01ee52
It looks like the long-anticipated bid for L’occitane could actually be happening soon. Today, Bloomberg reported that Blackstone and Reinold Geiger are close to making a potential offer. Most importantly, a few hours later, the company went into a trading halt “pending the publication of an announcement pursuant to the Code on Takeovers and Mergers.”
Bloomberg report: https://www.bloomberg.com/news/articles/2024-04-09/blackstone-said-to-near-buyout-of-skin-care-company-l-occitane?embedded-checkout=true
Trading halt announcement: https://group.loccitane.com/sites/default/files/2024-04/2024040900071.pdf
According to Bloomberg, Reinold Geiger, the billionaire owner of L’Occitane International, is reportedly preparing to offer to take the skincare company private at around US$7 billion. Blackstone and Goldman Sachs are expected to provide part of the financing.
Geiger is considering an offer to buy shares he doesn’t already own at HK$33 to HK$34 a share. Trading has been suspended since the beginning of the month, with the last price being HK$29.5/share.
https://seekingalpha.com/news/4095238-loccitanes-owner-is-said-to-prepare-buyout-offer
Finally, the offer has been announced. Reinold Geiger is buying L’Occitane for HK$34/share. Blackstone and Goldman Sachs are providing financing. The offer is final and the price will not be increased. Currently, the stock trades with a 5% spread, and the likelihood of the deal proceeding is high. Competing bids are out of the question given Geiger’s 72.6% ownership.
The primary condition for the deal’s success is that no more than 10% of disinterested shareholders, who represent 27% of the total shares, object. Already, 10.4% of the total shares have pledged their support for the acquisition. Additionally, the offer includes an option for up to 5% of the shareholders to roll over their shares.
The offer values L’Occitane at around 14x TTM EBITDA, in line with peers LRLCY, COTY and IPAR.
The idea has worked out well and the stock is now up 16% since takeover rumors resurfaced in early February.
https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0429/2024042905713.pdf