[Following our report published 17:03 CST Tuesday 8 August, L'Occitane entered trading halt at 09:00 on 9 August. A newswire report subsequently corroborated our information that the Chairman is considering a HKD 35 per share buyout offer]
Shares in L’Occitane International [HKG:973] have surged 25% since an after-market newswire report on 25 July (7.21pm HKT) said its chairman and 72.72% shareholder Reinold Geiger is planning a take private with a possible future relisting in Europe or elsewhere.
The stock climbed further after the Luxembourg-incorporated, French maker and retailer of beauty and well-being products published a half-denial on 27 July that served only to boost the equity market’s belief a deal is being worked on.
This news service has picked up further detail about the price, timeline and deal structure and has also identified a key risk to the potential deal.
Two sources, not directly involved in the deal, said they have heard the Chairman is planning to launch a tender offer for the 27.28% he does not own that will be priced at around HKD 35 p/s and could come in September at the earliest. JPMorgan has been mandated as financial advisor and Geiger has also talked to a couple of banks about financing, the sources said, adding that the longer-term plan is to subsequently relist the company in Europe.
The information makes a lot of sense.
From a financing point of view a HKD 35 p/s offer means Geiger will require HKD 14.2bn (USD 1.8bn) to finance the deal. This seems feasible as Geiger can leverage L’Occitane’s financial strength to finance the offer with debt even at a 10% borrowing rate.
From a premium perspective, an HKD 35 p/s offer looks deliberately priced to be just high enough to entice a key minority shareholder - ACATIS, which seems to present the key risk to a deal - to tender.
An offer of HKD 35 p/s would be slightly above the HKD 34.350 p/s level hit on 10 January 2022, which is the highest price the stock has ever traded in Hong Kong.
An offer at this level would represent a premium of 67.1% to the undisturbed price of HKD 20.95 on 25 July and a 71.1% premium to L’Occitane’s average price in the last 90 trading days. That puts it towards the higher end of a precedent premiums analysis of successful privatisations in Hong Kong, based on the scheme booklet for the take-private last year of Lifestyle International Holdings.
While an offer at this level makes sense on a premium basis its possibly a little light on a multiple basis.
At HKD 35 apiece, the take-private would represent an enterprise value of HKD 52.3bn (USD 6.7bn) and a TTM EV/EBITDA multiple of 13.1x based on EBITDA of HKD 4bn (USD 512.9m) for the year ended March 2023.
This multiple is in the fair range of EBITDA multiples when compared to non-Asian headquartered comps of a similar size, such as Natura & Co [NYSE:NTCO], Kenvue, and Intercos [BIT:ICOS].
Brazilian skincare owner Natura & Co and European peer Intercos are a similar size to L’Occitane and trade at 13.1x and 12.2x EV/EBITDA respectively. Even Kenvue [NYSE:KVUE], the USD 45bn mkt cap American consumer health arm spun off from Johnson & Johnson [NYSE:JNJ] (J&J), is trading at 13.6x EBITDA.
Other larger European and US-based peers, such as German MNC Beiersdorf [ETR:BEI], Estee Lauder [NYSE:EL] and L’Oreal [EPA:OR], trade higher at 18.9x, 25.6x and 23.7x EBITDA respectively.
But the implied multiple for L’Occitane starts to look a bit low when compared to the trading multiples of Asia-based peers.
Excluding Korean skincare brands owner LG H&H [KRX:051900], which is trading at 7.2x EV/EBITDA, all other Asia-based multi-brand beauty care owners are trading above 15x EBITDA. These include Giant Biogene [HKG:2367] (21.4x) and Proya Cosmetics [SSE:603605] (31.7x) and Japanese listed names such as Shiseido [TYO:4911] (20.9x), Kobayashi Pharmaceutical [TYO:4967] (15.6x), Kose Corp [TYO:4922] (19.8x), and Fancl [TYO:4921] (21.2x).
The multiple is also below Natura’s agreed sale in April of Aesop to L’Oreal for USD 2.525bn enterprise value. That deal valued the Australian skincare brand at 21x EV/EBITDA while Natura’s USD 1.86bn acquisition of Avon Products in January 2020 was completed at 15.8x EBITDA. In 2019, J&J’s USD 2.5bn acquisition of Japanese cosmetics and health products maker Ci:z Holdings was done at 25.9x.
Clearly this analysis suggests there is some scope for shareholders to argue for a little more than the multiple implied by HKD 35 p/s. But the offer price still looks okay and is clearly designed to leave the offeror with upside ahead of a planned relisting in Europe.
Key hurdle: ACATIS Investment
Behind Geiger’s 72.72% stake in L’Occitane, sits German fund manager ACATIS Investment Kapitalverwaltungsgesellschaft, which in total owns 7.01% in L’Occitane.
Our analysis finds that ACATIS has a buy-in price of around HKD 15.3 p/s. GANÉ Aktiengesellschaft, the fund adviser of the ACATIS Value Event Fonds, appears to manage most of ACATIS’ stake. GANÉ, which states that it “invests in winners” and “strong companies with sustainable business models”, has been a long-term investor in L’Occitane since 2014.
ACATIS and GANÉ fund managers have witnessed L’Occitane grew from a mono brand to a multi-brand manager over years. This development was celebrated in the fund’s July 2022 investment report that noted L’Occitane’s share price had “already doubled” due to the digitalisation-driven adaption of the businses model and despite the then ongoing zeo-COVID strategy in “places like China”. L’Occitane was trading at around HKD 26 p/s at that time.
Notably - and perhaps concerningly - it selected L’Occitane as one of just three investment examples in its August investment marketing presentation saying it believes the company’s revenue would increase by 10% p.a. over the next years and its EBIT margin will also rise. Furthermore, GANÉ’s stake in L’Occitane is ACATIS Value Fund’s second largest holding at the end of July 2023.
The fund manager points out that L’Occitane has reported a 20.2% YoY increase in revenue for the first quarter ended 30 June 2023, driven by growth of the brand Sol de Janeiro in the Americas and L’OCCITANE en Provence in China. The fund manager believes the acquisitions of LimeLife (2018), Elemis (2019) and Sol de Janeiro (2021) are now paying off.
Whether this all signals that the asset manager is now a willing seller of L’Occitane or not is unclear. What is clear is that the ACATIS and GANÉ holding in L’Occitane presents the biggest uncertainty around the take private. One angle to consider is whether or not the asset manager would – or is even able under its investment policy – to rollover into a take private.
According to a 26 July research report by Arun George on Smartkarma, there are two deal structure options: privatisation through merger by absorption or, as indicated by our sources, a voluntary conditional offer.
Because L’Occitane is incorporated in Luxembourg, the offeror could launch a privatisation structured as a merger by absorption, requiring the shareholder approval of a “special matter”, said George. L’Occitane’s articles of association stipulate that a special matter requires approval by at least 75% of disinterested shareholders. George notes that ACATIS’ holding equates to just over 25% of the company’s 402.9m (27.28% of the total outstanding shares) disinterested shares, and therefore amounts to a blocking stake.
Under option 2, George believes the offeror could launch a privatisation structured as a voluntary offer with a minimum acceptance condition set at at 95% of voting rights to exercise the right of compulsory acquisition (squeeze-out). He notes that this would require Acatis KVG to accept the offer and that a key risk to this deal structure is shareholder apathy that could prevent the offer from being declared unconditional.
George argues that ACATIS may be a seller at a price approaching HKD 30 p/s based on the fund manager’s most recent selldown, in July 2021, of a marginal stake at HKD 30.01 per share. The key question, though, is whether ACTIS is a willing seller of its entire stake at HKD 35 p/s and if not how much more does it want.
L’Occitane International and JP Morgan did not immediately respond to requests for comments. No phone number or email for Geiger was available in public domain.