L’occitane (973 HK) – Call to action

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This is a quick note discussing the buyout offer of L’occitane by it’s majority shareholder Reinold Geiger and Blackstone/Goldman who are advising/backing him in this deal.

Also for this note I will assume you are familiar with the company and the brands they carry. If you are not I would direct you towards fund manager Butler Hall Capital’s open letter to L’occitane. In his letter he was worried about exactly the situation that is currently happening, a low ball offer for the company at 34 HKD per share. Here is the letter and an excellent PowerPoint making the case for the value in the company: Butler Hall Capital LLC has issued an open letter to L’Occitane’s board of directors regarding the opportunity to maximize shareholder value through a relisting.

Details of the basic offer:

• HK$34/per share offer.
• Condition per HK-take over code: 90% acceptance of “disinterested shareholders” a.k.a. minorities. To be extra clear this means all shareholders who have no part in the buyout. The last 10% will be squeezed out if 90% is reached.
• 27.36% of shares are held by minorities and 90% need to accept = 90%*27.36%=24.624% need to accept.
• Some larger shareholders have already committed to irrevocably accept the cash offer and other have provided letters of support. If we add all of their shares together it is: 9.6%
• If 15.04% (24.624-9.6) of the other shareholders accept, the deal is done and there is nothing further to discuss.
• Timeline is to decide by 20th of May with a grace period (if company allows it) to 10th of June.

The twist in the offer:

I would speculate that Butler Hall’s letter and probably comments given privately from other shareholder (stock was halted for 3 weeks) the company has added an extra clause in the offer:

• If by 15th of May, 10% or more of disinterested shareholders, meaning 2.736% of shareholders (minorities) send a physical letter to the company, expressing their interest in an alternative to hold “rollover securities” the company will at their sole discretion release the details of such rollover share offer.
• This offer will only be valid up to 5% of shareholders
• Since there is 15.04% of share left to accept either the HK$34/per share or this offer (if it will be available), roughly a third of the remaining shareholders has the chance to receive rollover shares instead.

Rollover shares – what is it?

Well basically they don’t say what it is. Which in itself is a highly unusual strategy to say the least. They basically say, we offer HK$34/share but instead of declining the offer we may have another offer for you.

The name already implies that its a temporary share, anything else does not make sense anyway, why would you accept to get a share in an unlisted company for all eternity? Would be very few public investors that are interested in that, so then we have to go back to what Butler Capital was voicing out and other rumors we can find online.

I came across this article which also heard rumors’ about a listing of Sol de Janeiro: Vogue March 2024

What makes sense?

To me what makes most sense, and to maximize value for Blackrock/GS stakes in this deal. This means to separately list Sol de Janeiro in the US. Just like Butler Hall is saying, the clear peer company is US listed elf Beauty with ticker ELF. Both companies have very similar growth trajectories. And as the Vogue article linked above also says, SdJ near term growth prospects looks great with launching a whole new product line in sun screen.

Borrowing Butler Hall’s valuation comparison with ELF:

Currently ELFs Enterprise Value is slightly higher than when Butler wrote his pitch (now US$9,019m) but basically in in-line. If we assume that Sol can be listed at the mid-point of the two Butler estimates it gives us US$8.3bn just in value for SdJ, or HK$36.4/share (L’occitane holds 83% of the SdJ holding and 13% if held by founder Heela Yang), higher than the cash offer.

To make the estimate fully complete we have to take in the information given after Butler’s letter where SdJ founder Heela Yang was given 7% more of the SdJ shares as a call option. At a non-listed strike price cost of US$88.5m for that 7%. When this was announced the announcement is also hinting at that one of the options is listing the shares:

“in connection with (but conditional upon) completion of an initial public offering of Intermediate Holding Company, or a direct or indirect change in control of the Company, Parent Subsidiary may, at its discretion, require Connected Shareholder to sell all (but not some) of the Total Interest then-held by Connected Shareholder, provided that if the call option is exercised in connection with an initial public offering, then the call option exercise price per share shall match the public offer price per share of the initial public offering. “

What is the rest then worth?

The rest is basically L’occitane + Elemis and what will happen to those entities? Again, just a wild guess. But based on other conversations that Geiger wants to make a mark in the French “high society” my again pure speculation is that these entities will be listed in Paris.

Elemis has been doing well lately, growing at 12% on constant rates. One way to conservatively estimate its value would be the 900m EUR L’occitane paid for it, this is very conservative given that the brand has done quite well since.

L’occitane itself has been struggling, it’s very hard to use the latest trailing EBITs as the company decided to allocate an extra 100m EUR in marketing spend on the brand. Perhaps they have under-invested in the past but it also seems extremely well timed to sink profits significantly with huge extra costs and then start a take-over process.  The L’occitane brand in my view clearly has the capacity to deliver over 100m EUR in Operating Profit and Butler agrees (who has estimates even higher, see their pres). I would put a conservative EBITDA estimate for 2026 at 150m EUR, if you add another 50m EUR for Elemis or choose to value it separately does not matter too much. I will be using a 17x EBITDA multiple in-line with a developed market listed major cosmetics brand but far below the top portfolio companies like Estee Lauder and L’oreal (they are above 20x multiple).

This gives that L’occitane is worth conservatively 2,550m EUR and Elemis 850m, added together 3,400m EUR. After some quick maths this converts to HK$19.28/share.

All together

So Butler is claiming L’occitane is worth at least HK$45/share but with my calculation I would say even that is very conservative now that we are in a sharp situation of being bought out. I would say a fairly conservative IPO estimate is 36.4+19.3 = HK$55.7/share if you are allowed to get the potential roll over shares, wait the 6-9 months for this process to finish and then sell your allocations in SdJ in USA and the rest of the company in Paris.

That is an additional upside of 64% from the current cash offer.

Call to action

Clearly all shareholder who care and can hold an unlisted entity waiting for it to be listed again, should at minimum send a physical mail to L’occitane telling them you are interested in this option. This comes with no commitment its just to get the company to release the details of this offer.

What happens now?

Well I’m just a small personal investor, I hope that Butler Hall and the likes will opt for the roll-over option, or at minimum ask for what the details are before deciding, if nobody asks, we will not know.

Also I believe that the bidding group is allowed to buy shares in the open market now that the offer has been made. If they are buying, they could be soaking up many of the shares that are part of that 15% of free-float which has not committed to anything yet. In the past two trading days 35 million shares have traded hands, that’s 2.4% of outstanding shares. They need very few investors to accept the cash offer to just close this deal on HK$34 and never even need to open this Pandora’s box of rollover shares. But given the large turnover, that also means there is an opportunity for someone running a larger fund to in the open market to buy a 2.8% position and force the option of rollover shares.

If this option opens up, this could also mean that the value of the shares are not capped at HK$34 but the allocation one can get in rollover shares and the confidence one has in that this will yield a much higher value. Potentially this could start a bidding war for the shares still trading, very interesting in deed. For now I’m holding hard in my few shares and perhaps I will even send a letter of interest, even if my shares unfortunately will not move the needle.