HHa_e -0a_e -0 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Recent transactions in the perfume industry: the price of and other industry professionals scarcity Now that we know how the math works, we can also What could cause such a disconnect? 4. Finally, the scarcity of such assets and the will to mnderstand hoo the brand nalme Ömctmates oith the In our view, this discrepancy can be linked in large seize growth opportunities in a highly competitive main parameters. part to the following factors: market For a royalty rate between 4% and 8% and a discount 1. The secmring of fmtmre cash Öoos for an indefinite While the first three factors could validly impact the rate between 8% and 12%, the resulting brand value period of time. Indeed, in our previous numerical parameters considered to value a brand under the is between 0.3x and 0.9x sales. example under the relief-from-royalty method, we relief-from-royalty method or translate into That is the theory. Let’s now take a look at two recent had assumed that owning the brand was measmrable additional cash Öoos, the fourth factor real-world industry transactions: eiminalent to anoiding the paqment of a fmtmre has no direct financial translation and therefore leads • On 9 July 2015, Coty announced its merger with stream of royalties. In doing so, we omitted to say to the imestion each decision%macer in the indmstrq the P&G beauty business (and its large perfume that this acimisition is also a oaq to ÉsecmreÊ the shomld asc2 ohat price'premimm am A readq to paq for and cosmetics portfolio! for a combined eimitq ability to continue using the brand and avoid any such scarce assets? value of US$9.6b. While this portfolio is made of uncertainties that may arise at one moment or This race for scarce brands has also resulted in scores of owned brands and license agreements another (e.g., increased royalty rate upon renewal another strategq that clearlq has some benefits bmt ohich maces it difficmlt to analqre!, this translates of the license!. >mrther, in general, bq acimiring a will not be the ultimate answer to the industry’s into a 2.1x sales multiple. brand, the perfume manufacturer also secures challenges. This alternate or complementary strategy • On 19 March 2015, Inter Parfums announced the the cash Öoos associated oith preniomslq has consisted of perfume manufacturers looking for acimisition of the Jochas brand for MK)(0m. developed IP (existing fragrances) growth opportunities at the high end of the market, According to the company’s press release, the 2. The capabilitq to define the strategq on enerq i.e., the haute parfumerie niche market. brand achieved sales of US$46m at the time of the aspect of the mse and denelopment of the brand  The haute parfumerie is indeed an interesting way to acimisition, ohich translates into a *.+x sales ohich is mnlicelq mnder a license agreement  and address the market, as it allows manufacturers to: multiple. more specificallq on the follooing strategic • Avoid being dependent on third-party distributors In other oords, for these too transactions, the EN' decisions: (large, specialized retailers, such as Sephora) and sales multiple was more than four times what we • International development of the brand capture the margin associated with the distribution computed for a “typical perfume brand.” While the • Feo lamnches'innonations, ohich no longer of the perfumes utmost care should be taken when analyzing these need to be approved by the brand owner • Differentiate themselves from the “pack” of the transactions’ figmres as an example, the Jochas • Price positioning, which does not need to be fashion'lmxmrq brands oith a distinct image fine sales included some royalty revenues that should be approved by the brand owner fragrances specialist) and value proposition segregated and analyzed separately), we clearly see 3. Potential costs synergies [distribution, media ÉpersonaliredÊ'ÉmniimeÊ fragrances! that there is a great disconnect between the intrinsic buying purchasing power, Selling, General & • Increase the price scale with offers ranging from brand nalme indicated bq omr simplified theoretical Administrative expenses (SG&A), etc.] €100 to €700, as described in the following table, computation and the reality of recent transaction which summarizes some recent transactions in the prices paid in the industry. high-end segment of the market The luxury and cosmetics financial factbook 2016