What the Drunk Elephant Deal Means for Beauty M&A

The most anticipated beauty M&A deal of 2019 has finally happened — Shiseido has acquired Drunk Elephant for $845 million.
The deal underscores the Japanese buyer’s ambitions to globalize its beauty offerings, but also indicates that purchase prices for beauty brands may be calming down.
Industry sources had originally speculated that Drunk Elephant, a popular indie skin-care brand that was said to have about $100 million in net sales for 2018, could be sold for $1 billion — or even more. The auction process was said to have attracted a slew of big-name bidders, including Colgate, L'Oréal and the Estée Lauder Cos., but ultimately, Shiseido emerged with a new addition to its beauty portfolio. 
Industry sources were split as to why Drunk didn't get to the $1 billion mark, with some speculating that macro-economic factors were at play, and others noting that that price tag seemed to come out of the blue.
"I don't think that it's purchase prices dropping — the environment is getting more challenging," said one industry source, noting that the competition between Sephora and Ulta Beauty in the U.S. has started to take a toll on the brands that sell there, that Brexit is hurting sales in the U.K., and that protests in Hong Kong are affecting consumer behavior there.
Another source said it was never clear where the $1 billion idea came from, but that with the Shiseido sale, Drunk Elephant has achieved one of the highest sales multiples for a beauty brand. The Shiseido purchase price is said to be more eight-times 2018 sales, and more than 20 times earnings before interest, taxes, depreciation and amortization. Drunk Elephant is said to be on track to do more than $130 million in net sales for 2019, according to industry sources.
For Shiseido, the deal builds up its skin-care offerings and bolsters growth outside of Japan — something the company has been striving for under president and chief executive officer Masahiko Uotani.
“The brand is for us, almost a perfect storm in terms of to our current portfolio,” said Marc Rey, ceo of Shiseido Americas and chief growth officer for Shiseido Group, during an interview with WWD Tuesday morning at Shiseido’s new New York headquarters on Madison Avenue. He’d stepped out of a finance meeting to chat about his latest purchase, noting that Drunk Elephant has potential to expand internationally, but also the potential to grow its base of U.S. customers, and that for Shiseido, it adds more skin-care to a makeup-heavy U.S. brand portfolio. 
“It’s a skin-care brand, it’s a brand that connects enormously with the consumer … It’s cross-generation — yes, it does resonate very well with Gen Z and Millennials, but not only with Gen Z and Millennials. It’s a proven success — it’s not a secret to say the brand is number one in Sephora in the U.S.,” Rey said.
Shiseido was also attracted to Drunk Elephant's "clean compatible" ingredient standpoint, Rey said.
Drunk Elephant avoids what Masterson calls "the suspicious six" — essential oils, drying alcohols, silicones, chemical sunscreens, fragrances and dyes and SLS — in its formulations. With that philosophy, Drunk Elephant helped propel the concept of clean beauty into consumers' consciousness.
"There's no question that the clean momentum is important," Rey said. "Clean is important, but it's not enough. Drunk Elephant is much more than only clean — it's clean, it's effective, there's a whole philosophy behind it."
Shiseido has looked into buying clean beauty brands, Rey said, but noted that Bare Minerals, which it bought in 2010, was "probably the creator of clean beauty," and that Shiseido liked Drunk Elephant because it had a point of view in the clean space.
"Clean has become a huge expectation, and then there's a lot of segmentation in the clean and we like very much the way Drunk Elephant and the team have positioned the clean compatible and the clean effectiveness, so it clicked very rapidly as being compelling," Rey said.
The Drunk Elephant team will remain on board, Rey said, and Tim Warner, the ceo, and Masterson will report to him. The Drunk Elephant teams will remain based in Newport Beach, Calif., and Houston, he noted, and will have access to Shiseido's various Centers for Excellence for product development or digital expertise but ultimately, Masterson will continue to drive the product pipeline. Drunk Elephant could potentially expand in terms of products and categories, Rey added, declining to go into detail.
"We had a very good fit with the team," Rey said. "I think they're all going to feel at home. I just talked to Tiffany…we have the same kind of values. Respect of people, transparency, consistency, we say what we do and do what we say, and they're just like that."
“I started this business as an industry outsider, and from the beginning I did things a little differently,” Masterson said in a statement. “To join with a powerhouse beauty company such as Shiseido that leads the industry in innovation and global excellence is a dream come true for me and for Drunk Elephant. We share similar values, most importantly an unwavering commitment to the consumer. I chose a partner who will let the brand continue to be itself, with the same formulations and the same team.”
Where Shiseido is most likely to implement its big-beauty expertise is in international expansion.
"What we're probably going to adapt a little bit is the international development because we have to build this capacity and work on it with Tim and Tiffany," Rey said. "Although they have already initiated with success a number of international markets, international is always complicated. You have sometimes different retailers, different regulatory constraints, you need an organization … The Shiseido Group is obviously extremely well organized — we're talking about all regions, Europe, Travel Retail, Asia, and even in the U.S.
Read More: Drunk Elephant to Launch in China
"Frankly, the philosophy Tiffany has developed on Drunk Elephant is relevant for all regions," Rey added.
Euromonitor beauty analyst Gabriella Beckwith noted that Drunk Elephant's proposition is likely to do well in Asia. “With Asia Pacific expected to be the fastest-growing skin-care region globally, a 4 percent over 2019 2023, Drunk Elephant has the opportunity to blossom as Asian consumers continue to develop a greater appetite for clean beauty. For Shiseido, the acquisition is yet another step toward enlarging its global footprint, targeting a younger audience and expanding its scope beyond J-beauty,” Beckwith wrote in a note. Euromonitor figures show that Shiseido had 56 percent of sales coming from outside Japan in 2018, up from 52 percent in 2013.
Part of that increase is due to acquisitions. "The addition of Dolce & Gabbana and Laura Mercier have also participated , Rey said. "Drunk Elephant also has a lot of potential in Asia. It certainly impacts, in the short term, the America region, because this is where the bulk of sales are."
Shiseido's deal activity has picked up in 2019, since Rey took on the additional role of chief growth officer. Aside from Drunk Elephant, the company recently signed a beauty licensing agreement with Tory Burch. Before that, the company — ranked fifth on the WWD Beauty Inc. Top 100 list — had been mainly focused on tech acquisitions, though it added Laura Mercier in 2016 and invested in Violet Grey in 2018.
While the U.S. is already Drunk Elephant's biggest market, Rey sees potential for expansion in that market, too.
"If there's one source of potential in the U.S., it's the increase of awareness and the consumer base," Rey said. "Frankly, I believe the sky is the limit for the brand. We have an exclusive partner in the U.S., Sephora, which we're working extremely well with and we still have a hell of a lot of potential with them."
Drunk Elephant tapped Financo and Moelis to conduct the sales process. Shiseido worked with Jefferies.
For more from WWD.com, see: 
Shiseido Acquires Drunk Elephant for $845 Million
Shiseido, Estée Lauder Said Among Finalists in Drunk Elephant M&A Process 
Drunk Elephant Said Exploring Sale Options
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