| PARIS/HONG KONG
PARIS/HONG KONG L'Oreal SA (OREP.PA) has offered to buy Chinese facial mask maker Magic Holdings International Ltd (1633.HK), a move that would put the world's largest cosmetics group in the lead of the fastest growing sector in China's $15 billion skincare market.
China is the third biggest market for cosmetics in the world as well as for Paris-based L'Oreal's products.
Magic Holdings has the biggest market share in the facial mask market, a sector expected to grow more than 35 percent in the next two years - exceeding 27 percent expansion in the overall skincare market - according to data from consumer research firm Euromonitor.
Face masks have long been part of Chinese beauty rituals and are a popular way of combating pollution, particularly in big cities. Demand for them has been driven lately by a steady increase in the annual disposal income of China's middle class, in particular among a growing group of consumers termed 'metrosexuals' - men who spend lavishly to guard their looks.
The deal marks L'Oreal's biggest purchase since its 2008 acquisition of Yves Saint Laurent Beaute for 1.15 billion euros from the French group PPR (PRTP.PA), today renamed Kering, which still owns the eponymous fashion brand.
L'Oreal's HK$6.54 billion ($840 million) takeover offer for Magic Holdings, equivalent to HK$6.30-per-share, would be a small price to pay to expand in such a high-growth segment, said Summer Wang, Hong Kong-based analyst at BOCOM International investment bank.
"L'Oreal just needs to spend a small amount of money and can take over China's biggest facial mask player," Wang said. "Through this deal, it can fast-track its market share in this segment and the valuation is cheap."
The offer values Magic Holdings at 9.1 times its last fiscal year sales. L'Oreal trades at 7 times its 2012 sales while its acquisition of YSL Beaute valued it at 1.8 times sales.
Magic Holdings made sales of 150 million euros in 2012, up 29 percent on the previous year.
China's cosmetics market is expected to grow 63 percent for the five years ending 2015 compared to flat growth for second-ranked Japan, according to consumer research firm Euromonitor.
In a joint statement, Magic Holdings Chairman Stephen Tang welcomed the L'Oreal offer. Magic shares surged as much as 21 percent to an all-time high of HK6.10 on Friday, in a broader market that was flat .HSI.
The deal marks the French group's return to the acquisition trail in the region, having bought Chinese skincare brand Mininurse in 2003 and the following year Yue Sai, a cosmetics brand founded by a Chinese-American TV presenter.
Six key shareholders, representing 62.3 percent of equity, support L'Oreal's offer but the deal still needs to be approved by the Chinese Ministry of Commerce, L'Oreal said.
Magic Holdings, which has a market value of $676 million, had 288 distributors at the end of December, up from 261 in June last year.
The company also expanded into e-commerce this year after buying an online distributor in May, which would give L'Oreal greater access to China's booming online retail market.
L'Oreal's offer represents a 25 percent premium to Magic Holding's last closing price before trading in the shares was suspended on August 12 to prevent speculation.
The deal will be financed from L'Oreal's cash reserves and a 650 million euro credit facility from BNP Paribas (BNPP.PA), the two companies said in a joint statement. On completion, the shares will be withdrawn from the Hong Kong stock exchange.
Magic Holdings has two factories in southern China, with annual capacity of about 260 million pieces of peel-off masks and 12 million bottles of wash-off masks.
A new production facility which will go into operation by mid-2015, is expected to raise total capacity to about 400 million pieces of peel-off masks per year.
L'Oreal, which made 1.5 billion euros in sales in China in 2012, has a research laboratory and two production plants near Shanghai where it makes mass market products such as L'Oreal face creams, Garnier shampoo and some hair coloring products.
(Additional reporting by Astrid Wendlandt and Alexandria Sage in Paris and Alexandra Hoegberg in Hong Kong; Editing by Sophie Walker)