Philosophy Looking At Strategic Buyers

The Carlyle Group has put skin-care companmy Philosophy Inc. on the block for $1 billion, but doesn’t expect the buyer to be another private equity firm.

Instead, peHUB has learned that Philosophy’s bankers are initially targeting strategic buyers like Estee Lauder and L’Oréal, and will hit up private equity as a back-up plan. An IPO also remains possible.

One problem, sources say, it that there are few PE firms that “really” understand the cosmetics space. “Most of them have already done deals there and have taken their chips off the table,” explains one banker.

Valuations in the sector are high. Beauty care companies, with well positioned brands that are performing well, can command double digit multiples, a second banking source says. That would mean that Carlyle could be looking at a 2x cash-on-cash return.

Buyout shops that are active in the beauty space include Berkshire Partners and JH Partners, which both invested in Bare Escentuals before it was sold to Shiseido earlier this year for $1.7 billion. Castanea Partners bought Urban Decay in March 2009. TSG Consumer Partners sold SmashBox Beauty Cosmetics earlier this year to Estee Lauder.

M. Hadley Mullin, a TSG managing director, says that consumers continued to buy cosmetics during the downturn. “Consumers spent on products that made them look and feel better,” she says. “We are pleased that many of our companies grew in 2008 and 2009.”

Mullin, who declined to comment on the Philosophy sale, says she’s seeing more optimism in the beauty products space. “Multiples are edging up,” she says.
TSG, a middle market buyout shop with offices in New York and San Francisco, currently owns Alterna, which makes haircare products. It also has Perricone MD, a marketer of clinical skin care products. In early 2004, TSG sold Medtech Holdings, which owns Denorex dandruff shampoo and Cutex nail polish remover, to GTCR Goldner Rauner. GTCR then merged MedTech with Prestige Brands and the Spic and Span Co., and took the combined company public in February 2005.

Carlyle declined comment.