Shiseido offers $1.7 billion for US cosmetics firm Bare Escentuals

Japanese cosmetics company Shiseido said late on Thursday that it will take over US cosmetics firm Bare Escentuals for $1.7 billion.

Shiseido is offering $18.20 per share to buy all of Bare Escentuals' outstanding shares in a tender offer scheduled to open later this month. The price represents a 40.8% premium over Bare Escentuals' average closing stock price over the three-month period ended January 13 and a 39.9% premium over the closing price on January 13. Bare Escentuals has been listed on Nasdaq since 2006 when it raised $374 million in an initial public offering priced at $22.00 per share.

Shiseido's offer is conditional upon it securing a majority of Bare Escentuals' outstanding shares and of Leslie Blodgett continuing to serve as CEO of Bare Escentuals, as well as other conditions, including regulatory approvals.

Blodgett currently owns approximately 6% of Bare Escentuals and she has agreed to exchange 40% of this, representing 2.4% of the total share capital, for a continuing ownership. Berkshire Partners and its affiliates own 16% of Bare Escentuals and will be tendering its shares in the open offer.

Bare Escentuals will operate as a separate division of Shiseido.

San Francisco-based Bare Escentuals opened its first boutique in 1976. Its current product range spans mineral-based cosmetics, skincare, and body care products under the bareMinerals, bareVitamins, RareMinerals, i.d. and namesake Bare Escentuals brands, as well as professional skincare products under the md formulations brand. It distributes through home shopping television, specialty beauty retailers, department stores, company-owned boutiques, spas and salons and the internet.

Shiseido is acquiring a profitable, high-growth business. Bare Escentuals achieved revenues of $556 million for the fiscal year ended December 28, 2008, on which it earned a net profit of $98 million. Between 2004 and 2008 Bare Escentuals has managed to grow net sales 41% on a compound annual basis. Bare Escentuals currently derives more than 85% of its revenues from the US. It said in its Nasdaq filing that the takeover will help its international expansion. Specifically, it hopes to get a foothold in the Chinese and broader Asian markets where Shiseido is strong.

Shiseido is Japan's largest cosmetics company, with operations in over 70 countries. It is among the top three cosmetics brands in China and other Asian markets and has been steadily increasing its global diversification. It had annual sales of ¥690.3 billion ($7.5 billion) in fiscal 2009, of which 40% was generated from its overseas businesses.

The deal enables Shiseido to diversify into the mineral-based cosmetics market, and to strengthen its US business. Further, both companies will benefit from sharing production and research and development facilities. Shiseido's acquisition follows a number of cross-border acquisitions by Japanese pharmaceutical companies, all driven by the desire to diversify into higher-growth markets.

"This acquisition further enables Shiseido to move towards our goal of becoming a global player, representing Asia with its origins in Japan," Shinzo Maeda, Shiseido's president and CEO, said in a written statement.

Shiseido is being advised by Bank of America Merrill Lynch and is taking legal advice from Shearman & Sterling and Mori Hamada & Matsumoto. Bare Escentuals is working with Goldman Sachs and is taking legal advice from Ropes & Gray.

Moody's on Friday placed Shiseido on review for a possible downgrade, but noted that the deal "is consistent with Shiseido's overall business strategy and should enhance its product portfolio and strengthen its operations". However, it added, "Shiseido's financial metrics could worsen due to an increase in its external debt".