Beauty & Wellness Briefing: Beauty’s SPAC Attack

March 23, 2021November 9, 2021 Mary

This week, I take a closer look at the SPAC craze and revisit the beauty social selling space.

U.S. SPACs raised about $26 billion in January, nearly one-third of the $83 billion SPACs raised in 2020. That same month, Katherine Power, co-founder and CEO of media company Who What Wear, founder and CEO of beauty brands Merit and Versed, and co-founder of wine brand Avaline, sent an email to select colleagues announcing Powered Brands. With venture capitalist Dana Settle and her fund, Greycroft, Powered Brands raised more than $1.5 billion in orders by the end of its first pricing day in December. According to Power, Powered Brands’ plan of action is to acquire best-in-class brands in beauty, wellness and personal care.

While SPACs overall have been used as a vehicle to avoid market volatility, more thematically-focused SPACs are catching on. Just last week, Michel Brousset, formerly group president of L’Oréal’s North American consumer products division, announced his SPAC, Waldencast Acquisition Corp. With $633 million to invest, Waldencast is expected to pursue deals in the $1.5 billion to $3 billion range. AF Acquisition Corp. also just listed on the NYSE and Nasdaq. Backed by CEO Jordan Gaspar of AF Ventures, AF Acquisition Corp. announced pricing of $200 million for its IPO. It, too, is focused on the “better-for-you” space in health and wellness, beauty, personal care, food and beverage, and pet care.

“We see an opportunity to reimagine what it means to be a global beauty holding company by creating a platform that has native e-commerce expertise, clean ingredients, a sustainability-focused supply chain, data-driven decision-making and a transparent culture, with values like diversity and inclusion built-in from day one,” said Power. “Those are things that are so hard to layer on to a large company that’s not built that way from the ground up.”

Power believes that the companies Powered Brands acquires will be the next generation of beauty, wellness and personal care brands of note and that Powered Brands itself could rival conglomerates like Estée Lauder Companies and L’Oréal. “We know beauty brands make a great public company, with high gross margins and profitability. “We’re looking at these companies at the stage where they already have strong corporate governance and great management teams. They’ve likely raised private equity money and brought in stellar executives. Individually, they’ll check the boxes of a great public company,” she said.

Amid the lackluster roadshows of WeWork and “disaster” IPOs like Casper’s, SPACs offer consumer brands a safer bet. “A multi-company platform strategy is going to be more attractive to the market than a single beauty brand going public,” said Power.

Gaspar has similar thinking. “We have decided to pursue this endeavor, in order to expand on the vision of our partnership, and to provide capital in creative and thoughtful ways to pioneering companies entering the next phase of accelerated growth,” she said.

Before Chinese cosmetics company Yatsen filed its IPO late last year, it had been some time since an indie brand had the traction to go public in the U.S. like E.l.f. Beauty did in 2016. “Within the industry, there are many great emerging brands that could become an attractive public company with long-term growth prospects and attractive profitability profiles, and provide a platform for future consolidation,” said Brousset. “But even in this dynamic landscape, the path to growth and liquidity for beauty founders has been historically limited to one of two options: Either they become a strategic acquisition of a big conglomerate, or they are taken over by private equity. A big part of why we are doing what we’re doing is to create a third option for great brands.”

Brousset underscored that, fundamentally, the industries of beauty and wellness require a specialized skill set, which makes a focused SPAC all the better for investors and founders. “More than any other sector, success in beauty requires deep, specialized knowledge, and that takes time to build. Expertise in other sectors does not convert to beauty and wellness so easily,” he said.

Like Powered Brands, Waldencast Acquisition Corp. has created a multi-brand platform to scale the new guard of brands. Both companies have stacked the deck with tried-and-true consumer-focused executives. Powered Brands’ board of directors and advisors include Karen Cate, CFO at Thrive Market and former CFO of Kendo Brands, and Kimberly Paige, former COO at Sundial/Unilever and CMO at Coty. Waldencast Acquisition has tapped Felipe Dutra, who is CFO and CTO at Anheuser-Busch InBev, as executive chairman.

While nearly every company has a SPAC these days, the SEC warned in a news alert this month that, “It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” speaking of athletes and celebrities. This is interesting, given that, in beauty and wellness, some brand founders and influencers are becoming just as influential as Shaquille O’Neal, Serena Williams or Ciara, who are making their own SPAC forays.

For Waldencast Acquisition’s part, prospective brands and founders liked the efficiency of the SPAC process, said Brousset. The company’s proposition included a forward purchase agreement of $130 million that can flex up to $160 million, which Brousset called a differentiator versus more traditional SPACs. “It gives us real skin in the game, an alignment of incentives with investors and founders,” he said.

Groups of brands together that are marketed together may prove more attractive to some investors. And as we know, beauty executives can sell the shit out of anything. “Our investors are getting to know our strategy over the next several months. It’s unlike an IPO, where you do a roadshow over a week. You meet with 50 people in a room and you talk about your business for a short period of time. When we start trading, we’re not in a position where they’re learning about our business on a quarter-by-quarter basis. That helps to build trust and gives our company a stronger relationship with investors,” said Power.

Historically, SPACs, or reverse mergers, have had a spotty history. Operators reportedly used SPACs as fronts for “pump and dump” scams. Moreover, the increasing popularity of SPACs in 2021 could end up drawing more criticism and skepticism from the market.

Power, specifically, is hoping to bring more women to the table, especially as women are the driving forces behind purchases in beauty, wellness and personal care. Only approximately 1% of women are leading SPACs. Additionally, among the 3,000 largest U.S. publicly traded companies, only about one in five board members are women, according to Equilar.

“Dana and I are big advocates of getting more females into public companies. And I don’t just mean at the leadership level. Of course, we want to see more female CEOs of public companies, but you can create generational wealth for more women throughout the whole organization this way,” she said. Power said, across Clique Brands, Merit, Versed and Avaline, 97% of employees are female.

She continued, “The most powerful thing I can do for those women is give them stock in a public company that’s going to grow significantly year-over-year for the 10 years. As a venture-backed company you sell your company once, all the employees get a check, and they get a small lump sum of money. Then, they move on and maybe go work in another startup to try to build wealth that way. If instead, I’m able to give them public stocks, that they can actually have a direct impact on growing women’s wealth.”

Social selling is on the rise

Covid-19 negatively impacted many beauty businesses, including those in the salon industry. But, increasingly, companies with a direct selling model are bucking trends Home décor brand Longaberger, known for its baskets, is the latest to fall for the beauty category. In January, the company quietly launched its Essential Skin, Home Fragrance, and Soap and Lotion categories to entice its female base. “We were thinking about what people do in their homes, and we are trying to be a part of their lives from the minute they wake up to the moment they go to sleep. Beauty falls into our mission of making everyone’s day a bit better,” said Bob D’Loren, chairman and CEO at Xcel Brands.

In 2019, Xcel Brands purchased Longaberger after it filed for bankruptcy the year prior. It also owns Isaac Mizrahi, Judith Ripka and Halston. Longaberger relaunched on its own site and with QVC. The brand is targeting Gen Z and millennial women with its new beauty launches. Currently, Longaberger’s customer base is 25% millennials, 25% Gen X, 40% baby boomers and 10% Gen Z. The expectation is that the Gen Z shopper segment will grow over time, said D’Loren.

To coax younger shoppers to see Longaberger as a brand for them, the company has re-emerged with a website made for the times that treats sellers like influencers. “The bankruptcy was a curse and a blessing because most of the direct-selling companies that are out there are not direct-selling companies; they have very complicated compensation structures. The digital platforms they’ve tried to implement are very complicated and cumbersome to use. Our real differentiators are that we’re simple, straightforward and very transparent,” said D’Loren. To be a Longaberger seller, representatives pay $4.17 a month or $49 a year. They can earn up to 20% on purchases on their dedicated pages and 5% when recommended stylists join their team.