Shiseido Co Ltd <4911.T>, Japan's largest cosmetics company, has agreed to buy U.S.-based Bare Escentuals
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.
Shiseido 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.
Kao Corp <4452.T>, a rival toiletries and cosmetics firm that bought Kanebo in 2006 and British luxury skincare brand Molton Brown in 2005, 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 in their biggest rise in 6- months, beating a flat Nikkei average <.N225>.
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.
Bare Escentuals' 2008 operating profit margin of 31.5 percent was more than quadruple Shiseido's 7.2 percent in the year to last March, according to Shiseido.
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 earns 62 percent of its sales in Japan, has been selling $1,000 anti-aging face creams along with rivals Kao and Kose in the fast-maturing Japanese market.
Shiseido is not a global player on natural-ingredient products, for which demand is growing, Shiseido President Shinzo Maeda told a news conference. By capitalizing on Bare Escentuals' strength in this area, we can expand our clientele.
He said Shiseido can also capitalize 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.
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 and Ian Geoghegan)