Dealmakers search for acquisition bargains in cosmetics and pharma

Corporate bargain hunters are looking for good buys in cosmetics and healthcare as the economic downturn throws up a range of acquisition opportunities.

Dealmakers admit that the acquisition market is currently subdued but activity is expected to pick up in the second half of the year, according to a survey of private equity firms, investment banks and law firms by the Association for Corporate Growth (ACG) and Thomson Reuters.

Of the 703 decision-makers surveyed, 56 percent said they expect M&A transactions to increase in the next six months while only 10 percent anticipate a slowdown.

Driving forces behind pharma buy-outs

One of the sectors tipped to see the most activity is healthcare and life sciences. In light of declining R&D spending, expiring patents for blockbuster drugs and downward pricing pressure, pharmaceutical companies are looking outside their businesses for growth opportunities.

The year has already seen a flurry of deal activity with highlights including the Pfizer buyout of Wyeth for $68bn and the Merck & Co purchase of Schering Plough for $41bn.

By comparison, acquisition news in cosmetics has been limited with headlines concentrating on dramas related to the BASF/Ciba and Dow/Rohm & Haas mega deals.

Financing constraints are likely to rule out more such mega deals in 2009 but commentators expect distressed sales to be a driving factor behind deal activity.

Distressed companies are a leading target

Commenting on the M&A market, Dennis White, ACG vice chairman and senior counsel, said: “The anticipated increase in activity will be led by sales of distressed companies to bargain-seeking private equity firms and strategic buyers.”

In April Patriarch Partners acquired high-end make-up brand Stila Cosmetics in a private equity deal that fits this template.

Stila Cosmetics, which was once owned by Estee Lauder, has changed hands regularly in recent years and the latest deal comes after former owners Sun Capital Partners failed to turn the company’s fortunes around.

Deals are also expected to pick up on the supplier side of the cosmetics industry. Eric Vogelsberg, Snr VP, management consultancy, at Kline & Company, recently told CosmeticsDesign.com that for chemical companies willing to throw of the “bunker mentality”, there are hidden gems to find.

Small bolt-on and mid market acquisitions are tipped to increase in number as companies look to sell unprofitable lines or business units to consolidate their operations and escape financial difficulty.

Vogelsberg said the greatest activity would be in the $300m to $600m price range with product lines, small private companies and small divisions of major firms being the main targets.

He said beauty suppliers and cosmetic lines are likely to be of particular interest to buyers because they are generally under less economic pressure than other chemical businesses and products.