Estee Lauder / Tom Ford Deal Rationale

Estee Lauder recently agreed to acquire Tom Ford for $2.8B, with PWP and GS advising Estee Lauder and Tom Ford, respectively (https://www.bloomberg.com/news/articles/2022-11-1…). It seems like the majority of the deal's rationale was for Estee Lauder to acquire Tom Ford's fast-growing beauty business, which has an especially strong presence in China, the largest market. However, would love to hear some thoughts from C&R bankers on whether the acquisition really worth $2.8B given that Estee Lauder already has a licensing agreement with Tom Ford and that Estee Lauder would also be acquiring Tom Ford's fashion apparel business, which Estee Lauder has no experience in. 

Comments (8)

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  • Associate 2 in PE - LBOs
2mo 

Personally think it makes sense. Tom Ford has a really strong growth trajectory in Asia, especially with its beauty business, and it makes sense for Estee Lauder to acquire a high-growth, higher-end brand with strong market presence into its portfolio. It's a fair point that Estee Lauder has no experience outside the beauty products industry, but it should be noted that Tom Ford's apparel business makes up a pretty small portion of its revenues so it's not like an especially large portion of the purchase price is at risk for value destruction in the case that Estee Lauder messes up Tom Ford's apparel business.

Although, I have to say I'm surprised that Estee Lauder came out on top. Rumor was that Kering put in a higher bid at ~$3B. Personally, I think an acquisition by Kering makes a lot more strategic sense, given Kering's vastly superior experience of operating a portfolio of high-end diversified luxury brands (Gucci, Yves Saint Laurent, Balenciaga, Alexander McQueen, Bottega Veneta) and the potential synergies. That being said, acquiring another high-end brand also has the risk of cannibalizing sales from Kering's other brands. 

  • Intern in IB - Cov
2mo 

I'm guessing that Tom Ford rejected the Kering bid because of their already close business relations with Estee Lauder, given their licensing agreement, and less operational disruption to Tom Ford with an Estee Lauder acquisition than a Kering acquisition.

  • 1
  • Analyst 2 in IB - Cov
2mo 

Would just add that Ermengildo Zegna, who had the licensing agreements for their apparel business acquired the Tom Ford's apparel business from Estee Lauder as part of the transaction so Estee Lauder will only be operating the cosmetics business, which is what I presume was their intention all along. 

https://www.bloomberg.com/news/articles/2022-11-16/ermenegildo-zegna-zgn-to-buy-tom-ford-fashion-unit-in-estee-lauder-el-deal 

  • Associate 3 in IB-M&A
2mo 

Disclaimer, I don't work in C&R...

...but it was definitely for beauty and was really to retain those licensing agreements, TF has become a key franchise for them and even with a near-term dilutive deal it's a good move strategically. It was widely reported that Kering was circling as well - they would have almost certainly ended those licensing agreements (they expire in 2030) and EL wanted to retain them. They now have not only permanent licensing, but don't have to pay royalties anymore on something that is already a cash cow.

The fashion business isn't their bread and butter, but they've already announced a licensing agreement with Zegna so they won't have to deal with it on a day-to-day basis.

  • Analyst 1 in IB-M&A
2mo 

Estee Lauder's been pretty focused on building out its high-end portfolio, which it lacks compared to competitors (just announced the partnership with Balmain as well), and TF fits in well with a pretty good growth trajectory and brand recognition in the high-end fragrances space. Also, Kering was also bidding in the process and if Kering won out Estee Lauder's licensing agreement with TF would likely be gone, so the deal also had defensive rationale.

  • 1
  • Intern in IB - Cov
2mo 

Does anybody have any additional transaction details about multiples paid, growth/profitability of TF, etc? 

Also noticed that the transaction involves $300m in deferred payments--is that basically the equivalent of seller financing?

2mo 
jackwestjr, what's your opinion? Comment below:

Charging $200 for a $2 bottle of cologne is good business.

  • 1
  • 1
2mo 
Bossdogfrog, what's your opinion? Comment below:

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