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Estee Lauder to Buy Smashbox Cosmetics

Estée Lauder Cos. nabs the photo-studio-born makeup company Smashbox, a company founded in 1996 by Dean and Davis Factor.

By
with contributions from Rachel Brown
color-cosmetics/news

The Estée Lauder Cos. Inc. has gone Hollywood, nabbing the photo-studio-born makeup company Smashbox Beauty Cosmetics Inc. in a bid to move deeper into the fast-growing, alternative retail channel and gain entrée into the digital media space.

Lauder said Monday it has signed a definitive agreement to buy the Los Angeles-based makeup brand, founded in 1996 by Dean and Davis Factor, the great-grandsons of legendary Hollywood makeup artist Max Factor. The acquisition includes a minority stake in Smashbox Studios, the Los Angeles photo facility started by the Factor brothers in 1991. The deal is expected to close in July, subject to certain conditions, including regulatory approval.

The purchase price was not disclosed, but sources estimated it was between $200 million and $300 million. WWD first reported on April 23 that Lauder may have been in talks to buy Smashbox.

“We like the brand and its photo-studio inspired, Hollywood positioning,” Lauder’s president and chief executive officer Fabrizio Freda told WWD during a call from Los Angeles Monday morning. “Smashbox operates in a selling environment that is of big interest to us, specialty retail, where we want to continue to grow.”

North American department stores account for 30 percent of Lauder’s total revenue of $7.3 billion in fiscal 2009.

Freda added that Smashbox Studios, complete with its digital capabilities, will benefit the entire Lauder company. The deal marks the first acquisition since Freda assumed the ceo post in July. Leonard Lauder, chairman emeritus of the company, could not be reached for comment, but it is known he is a strong supporter of the acquisition.

Smashbox generates about $80 million in wholesale revenue and $140 million in retail sales, according to a source with knowledge of the company’s finances. In 2006, private-equity firm TSG Consumer Partners acquired a minority, noncontrolling stake in Smashbox.

“We and the Factors are pleased that the brand will now reside within the Lauder company,” said Hadley Mullin, a managing director at TSG. “We are confident that Lauder will be a tremendous steward.”

Mullin said TSG and Smashbox have been in serious talks with Lauder about a potential acquisition for several months, and that the brand has fielded inquiries from interested buyers for a number of years.

About a year ago, Smashbox tapped Deutsche Bank to act as a financial adviser as it considered strategic alternatives, including the sale of the company.

Smashbox’s prowess in fast-growing retail channels, particularly TV shopping, and its presence in open-sell store formats, including Ulta, Sephora and Macy’s Impulse Beauty concept, offer Lauder a stronger presence in alternative channels, particularly as shoppers continue to shift away from department stores. It also rounds out Lauder’s holding of venerable makeup artistry brands, which include MAC Cosmetics and Bobbi Brown.

Smashbox is sold throughout North America as well as some 60 countries worldwide, said Dean Factor. “We’ve grown to a point where we feel that the Lauder company can take us to the next level,” said Factor. Smashbox will continue to operate out of its Los Angeles office, and Dean Factor, co-founder and ceo; Davis Factor, co-founder, chief creative officer and celebrity photographer, and Budd Taylor, president, are expected to play key roles in the integration and the brand’s future plans.

Caris & Co. analyst Linda Bolton Weiser said, “[Lauder] has a history of taking something relatively small and expanding sales.” She added, “They’ve made MAC and Bobbi Brown hugely successful.” Bolton Weiser said Smashbox is Lauder’s largest acquisition of a brand that is dominant outside of department stores.

The deal broadens Lauder’s presence on the airwaves of the largest TV retailer, QVC, where Smashbox consistently ranks among the top 10 beauty brands. Smashbox also is sold on QVC in the U.K. and Germany.

Allen Burke, director of merchandising at QVC, where Smashbox premiered in 1998, credited Dean Factor’s vision for taking a chance on television home shopping. “He comes across as casual California. He is really a very bright business guy,” said Burke. “He was willing to listen to where we were going and what we were doing, and it made sense to him, and he clearly charted his own path. To be fair, it was a time when there was a lot of makeup artist brands emerging and the field got cluttered quickly, perhaps that was part of the attraction.”



Smashbox’s move to QVC was auspicious and the home shopping channel has been an important platform for the brand’s products. Halo Hydrating Perfecting Powder, which boasts the benefits of skin care ingredients, is a case in point. QVC put the product, priced at roughly $72, on its Web site three months before it was presented on air and had a year-long exclusive. To date, more than 144,000 units have been ordered via QVC.

Currently, Lauder sells Bobbi Brown, Origins, Clinique and the hair care line Ojon on QVC. At this point, none of the Lauder brands are sold on QVC’s main rival, HSN.

Smashbox is best known for camera-friendly products such as Photo Finish primer and Photo Op Under Eye Brightener. Freda said its positioning as a photo-studio inspired, Hollywood brand gives Smashbox a unique positioning within the Lauder brand portfolio, which includes makeup artist-created lines MAC Cosmetics, with its strong fashion bent, and Bobbi Brown, which is tailored for everyday women. Also, because Smashbox largely lives in different retail channels from MAC and Bobbi Brown, Freda said he does not anticipate the brand to cannibalize sales of the other two or the remaining 24 brands in the group’s portfolio.

John Demsey, Lauder group president responsible for the MAC, Bobbi Brown, Estée Lauder, Tom Ford, Prescriptives, Jo Malone and La Mer brands, will oversee Smashbox after the close of the deal. “This is a meeting of like-minded organizations,” he said, noting they are both family oriented and focused on field service and selective distribution. Demsey said, “We come here with tremendous respect for what [Smashbox] has accomplished. Smashbox offers a fresh new way of looking at specialty retail and at video and creative production.”

William Lauder, executive chairman of Lauder, stated, “One of the enduring strengths of the Estée Lauder Cos. is our ability to identify brands with unique positioning and nurture those brands to accelerate their momentum and realize their full growth potential. The addition of Smashbox to our portfolio continues this 64-year legacy. We expect that with our strong cultural synergies and shared appreciation for family heritage, this will be a wonderful union.”

At first glance, Smashbox doesn’t seem to neatly fit into Lauder’s strategic priorities — as outlined by Freda earlier this year — of skin care and Asia. But last month, Freda clarified to WWD, “Skin care and Asia are our priorities, but we also will look more broadly.” He emphasized, “We’ve always said [mergers and acquisitions] are part of our strategy,” adding the company will pursue opportunities that widen its reach by category, distribution channel and in geographic scope.

As one analyst declared, “Lauder can’t ignore open sell anymore.”

The news of Lauder’s acquisition of Smashbox did not shock retailers, although some expressed modest surprise. They are curious to see how Lauder will grow the brand.

Robin Coe-Hutshing, founder and creative director of Studio BeautyMix, which houses a Smashbox Pro Studio, said, “I knew Lauder would never be going the indie route again with smaller brands. I don’t see them nurturing small brands to the finish line any more.” She added, “It has to be something that can really go to the distance in the Lauder scheme of bigness and this certainly fits the bill. I think it complements their other brands. It is not particularly redundant in terms of the mission statement of the brand.”

Burke of QVC gave the union his blessing, saying, “We love Smashbox. We are so grateful to them for their commitment to us for all of these years, and we are very much in awe of the Lauder corporation and anxious to be a greater partner to them. It is good thing as far as we are concerned.”

As mergers and acquisition activity has begun to thaw this spring, multichannel beauty brands have been in high demand. Earlier this year, Shiseido Co. Ltd. acquired mineral makeup company Bare Escentuals Inc. for $1.7 billion, giving the Japanese cosmetics giant a stronger foothold across all retail channels, TV shopping and open sell included.