What's hot and what's not in Citic Capital’s NZ beauty buy

The buyout firm’s acquisition of New Zealand-based Trilogy is on trend with global consumer shift towards natural products but out of fashion in age of born-digital upstarts and single brand VC-investments.

The $250 billion beauty industry is at the cutting edge of consumer trends and a bellwether of change for the fast-moving consumer goods sector.

Private equity and venture capital (VC) firms have been upping their investments in firms that best embody the latest trends in online shopping, such as Urban Decay and Anastasia.

These attractive propositions are single-brand, digitally savvy and environmentally-minded firms, according to an analysis of the global beauty sector by consultants at McKinsey, which was released this week.

In Asia, LVMH-backed L Catterton Asia bought a stake in Korea’s Clio in 2016 while Bain Capital has invested across the beauty supply chain, from medical beauty specialists to cosmetics packaging.

In the latest example of private equity’s growing interest in the beauty industry, Citic Capital China Partners said on Wednesday it had completed the acquisition of New Zealand-based Trilogy International.

In some senses the deal is the face of the new trend. In others, it falls short.

Trilogy’s flagship natural organic rosehip oil skincare brand and candles crafted from natural waxes under the Ecoya brand have a growing following.

“These brands advocate natural beauty and natural lifestyle, which corresponds to the desire of today’s consumers across the globe,” Hanxi Zhao a senior managing director of Citic Capital, said in a statement.

McKinsey found 31% of the beauty companies that win VC funding use natural or organic ingredients and commit themselves to following certain social or environmental standards.

On the other hand – the upstarts in the global beauty industry are almost all single-brand beauty companies. These nimble firms account for almost 50% of the $2.7 billion in VC investments the beauty industry has received since 2008 and 80% of VC funding in 2017.

Finally, the growth of born-digital challenger brands is accelerating: more than 70% of the $2.7 billion in VC investments were made from 2014 to 2017.

That’s not to say Trilogy does not have an e-commerce strategy, with a particlar focus on China. “We are pleased with the results to date, most notably the success of “Singles’ Day” which delivered 175% of expected retail sales,” Trilogy said in its presentation to analysts of its interim results, referring to the annual day of online sales initiated by Alibaba.

In an update on its China strategy in October, Trilogy said it distributes in the world’s second-largest economy online various platforms such as Tmall, WeChat and Weibo. Its wholly owned subsidiary CS&Co distributes its products in New Zealand.

Growing sales in China is partly offsetting the decline in its domestic market. A risk to this crutch on the horizon is China’s proposed changes on ecommerce sales, which were delayed again until the end of the year.

Citic Capital China Partners III, L.P agreed to acquire all of the issued shares in Trilogy on December 15. Investors were paid NZ$2.90 per cash per share. When the deal was announced the price represented a premium of 27.8% to Trilogy’s closing New Zealand share price on December 14. The acquisition represented a EV/Ebitda multiple for the 12 months to September 30 of 13.6 times.

Trilogy has been delisted from New Zealand’s and Australia’s stock exchanges.

Citic Capital also said Felix Danziger would join the Trilogy board as a director and Roy Brown had been appointed as chief financial officer. Citic did not immediately respond to comment on their affiliations.

First NZ Capital served as financial advisor and MinterEllisonRuddWatts served as legal counsel to Citic Capital.

Venture capital investment in millions of $

 

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