L’Oréal’s tardy skin care facelift may backfire
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to fix typo in third paragraph.
By Yawen Chen
LONDON, Aug 5 (Reuters Breakingviews) -L’Oréal OREP.PA seems to be having second thoughts. Ten years after selling its stake in medical skin specialist Galderma GALD.S, the French cosmetics giant said on Monday it was buying a 10% stake in the $19 billion fast-growing Swiss-listed firm. The timing of the move by CEO Nicolas Hieronimus is surprising, given that L’Oréal sat on the sidelines of Galderma’s initial public offering in March. By making an incremental move, L’Oréal also risks making a potential full takeover overly expensive.
The two companies go way back. In 1981, L’Oréal established Galderma as a joint venture with Nestlé, focusing on skin care products for decades before selling its 50% stake to the consumer goods giant in 2014. Still, Galderma competes head-on with L’Oréal in the dermatological skin care sector with brands like Cetaphil, popular with those with sensitive skin. More importantly, Galderma’s diversification into injectables products used to smooth wrinkles, including Botox competitor Azzalure, is a key source of growth. Sales in this segment grew 13.4% in the first half of 2024 from a year earlier.
Growing consumer interest towards medical skin care brands including L’Oréal’s CeraVe and La Roche-Posay is a known trend. But L’Oréal’s renewed interest is understandable. Hit by weakness in the broad cosmetics industry, Hieronimus’s company is inevitably showing signs of fatigue. Sales growth in its star dermatological beauty division slowed to 10.5% year-on-year in the second quarter of 2024, from 21.9% in the first quarter.
Such a defensive move has its downside. Before the deal announcement, Galderma’s shares were already trading above its IPO price of 53 Swiss francs. Monday’s deal announcement sent them at one point 8% higher than the previous close. That would make a full takeover a lot more challenging: L’Oréal now trades at around 18 times its 2025 EBITDA, down from around 22 times at the time of Galderma’s IPO, according to Breakingviews calculations based on LSEG data. That is roughly the same as where Galderma is currently trading. If L’Oréal were to acquire the whole of Galderma now with a standard 30% premium, the return on invested capital before any cost savings would be a mere 3%, assuming $1.1 billion of Galderma operating profit for 2025 from LSEG-compiled forecasts, $2.6 billion of net debt, and a 30% tax rate.
For Hieronimus, Galderma could turn out to be an effective but expensive facelift.
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CONTEXT NEWS
L’Oréal will acquire a 10% stake in Swiss skin care firm Galderma for an undisclosed premium, the two companies said on Aug. 5, without disclosing the price.
L’Oréal said it will not seek to be represented on Galderma’s board of directors.
The transaction will be funded with L’Oréal’s available cash and credit lines, and is expected to be completed in the coming days, the French cosmetics giant said.
Galderma shares were up 7% at 71.6 Swiss francs a share as of 1015 GMT.
Graphic: Galderma has outperformed L’Oréal since its March IPO https://reut.rs/4dxCymL
Editing by Lisa Jucca and Oliver Taslic
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