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By
Reuters
Published
Jan 15, 2010
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Japan's Shiseido to buy Bare Escentuals for $1.7 billion

By
Reuters
Published
Jan 15, 2010

Shiseido
Bare Escentuals

By Yumiko Nishitani and Nivedita Bhattacharjee

TOKYO/BANGALORE, Jan 15 (Reuters) - Shiseido Co Ltd (4911.T), Japan's largest cosmetics company, has agreed to buy U.S.-based Bare Escentuals (BARE.O) for $1.7 billion, as it looks to speed up its expansion and break into a new part of the North American market.

The California-based firm, which markets natural-looking cosmetics and runs 800 retail outlets in the United States, will operate as a separate division of Shiseido, and its brands will continue to be run by CEO Leslie Blodgett.

Shiseido, which began as far back as 1872 as Japan's first Western-style pharmacy, has been focusing on growth in China to offset a $24 billion home market that is shrinking as Japan's population ages.

The company said adding Bare Escentuals, a San Francisco-based cosmetics and skincare firm, would help it move into the fast-growing natural-ingredient cosmetics market. Bare Escentuals would have lifted revenues at Shiseido last year by 8 percent and operating income by 36 percent.

Bare Escentuals is known for its skin care and body care products under the bareMinerals, RareMinerals and its eponymous brands.

"Bare had good opportunities for growth internationally, but the size that they are, they needed greater resources. Shiseido provided them so many greater resources... into Europe and into Asia," Jason Gere, an analyst with RBC Capital Markets, said.

"It's just much more difficult for smaller companies to grow on their own when they want to grow internationally," he said.

The deal follows on the heels of a number of recent buyouts in the consumer space, including Sanofi-Aventis' (SASY.PA) proposed buyout of U.S. consumer healthcare group Chattem Inc (CHTT.O), and Jarden Corp's (JAH.N) deal with a baby and home care company owned by French energy concern Total S.A. (TOTF.PA).

Japan's Kao Corp (4452.T) is also looking for beauty-care product brands in the United States and Europe.

Japan's third-ranked Kose Corp (4922.T) has also said it would consider an overseas acquisition if the right deal came along. Shiseido shares gained 6 percent on Friday 15 January in their biggest rise in 6-� months, beating a flat Nikkei average .N225.

Bare Escentual shares were up 42 percent at midday Friday 15 January on Nasdaq.

The acquisition may strengthen Shiseido's presence in a competitive North American market and help it expand in Central and South America, said Ryosuke Okazaki, chief investment officer and senior vice president at ITC Investment Partners, an asset management arm of Itochu Corp.

"But investors are still trying to see if these two strong brands can help one another grow, without competing," he said. Shiseido is offering $18.20 per share in the cash deal, a 43 percent premium to Bare Escentuals' last Nasdaq closing price.

A GOOD FIT

"This looks to be a good operational fit for both companies. Bare's growth over the next few years was largely expected to come outside the United States, particularly in Japan," Suntrust Robinson Humphrey analyst William Chappell said in a note.

"The merger with Shiseido should help accelerate this growth while also giving that company (Shiseido) a stronger foothold in the U.S," he said, adding that the offer was at a reasonable valuation.

Shiseido, which earns 62 percent of its sales in Japan, has been selling $1,000 anti-ageing face creams along with rivals Kao and Kose in the fast-maturing Japanese market. [nTOE5B60BC]

"Shiseido is not a global player on natural-ingredient products, for which demand is growing," Shiseido President Shinzo Maeda told a news conference. "By capitalising on Bare Escentuals' strength in this area, we can expand our clientele."

He said Shiseido can also capitalise on Bare Escentuals' TV and Internet-based marketing expertise. Cosmetics sales via these channels are growing in Japan, but Shiseido has been a small player.

Analyst Gere of RBC Capital markets said it would have been difficult for Bare to grow earnings while they still continued to invest in advertising and other infrastructure.

"For Bare, this, in many ways, provides them the same growth opportunity, with much easier way to achieving them," Gere said.

Shiseido will consider more overseas acquisitions, but is not in any other talks now, Maeda said.

Some analysts cautioned that Shiseido may be paying too much for a brand that is little known in Asia and has limited room for further growth in the United States.

"Shiseido needs to target Asian countries for its sales and profits to grow, but it's not clear how Shiseido will expand its Bare Escentuals business in Asia," said Toshihiko Matsuno, senior strategist at SMBC Friend Securities. "I don't think I can justify a $1.7 billion acquisition price."

Maeda said the deal was not over-priced given the U.S. firm's high profitability and potential.

Shiseido will fund the acquisition with 30 billion yen

($329 million) in cash and cash equivalent and a 150 billion yen bank bridge loan.

BofA Merrill Lynch is advising Shiseido, while Goldman Sachs is advising Bare Escentuals.

(Additional reporting by Chikafumi Hodo and Mariko Katsumura in TOKYO and Nick Zieminski in NEW YORK; Writing by Mayumi Negishi; Editing by David Dolan, Ian Geoghegan and Jarshad Kakkrakandy)

((nick.zieminski@thomsonreuters.com +1 646 223 6162; Reuters Messaging: nick.zieminski.reuters.com@reuters.net)) Keywords: SHISEIDO/BAREESCENTUALS

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