The recently announced acquisition of beauty and skincare brand Rhode, founded by celebrity Hailey Bieber in 2022, for $1 billion by veteran cosmetics brand e.l.f. Beauty, marks a pivotal moment in the rapidly evolving beauty industry. What would be one of the largest beauty deals in recent history, the transaction reflects both a renewed appetite in the mergers and acquisitions (M&A) space and the significance of brand value in dealmaking.
The Deal: Expanding Reach and Prestige
Known for mass-marketing affordable cosmetics, e.l.f. Beauty made a strategic leap into the luxury beauty market by acquiring Rhode. Rhode’s attractive direct-to-consumer model, viral social media presence, and cult-favorite products propelled it to $212 million in annual revenues, all achieved without traditional retail distribution. The deal comprised $800 million in cash and stock at closing, with an additional $200 million earnout tied to Rhode’s future brand growth over the next three years.
M&A Takeaways From the Rhode Transaction
Due Diligence and Contract Negotiations Remain Key
The Rhode acquisition serves as a potential catalyst for an M&A revival that major players in the beauty industry are standing behind. The deal’s mix of cash, stock, and performance-based earnouts is a nod to real value creation, meaning e.l.f. recognized Rhode’s success and credibility and saw confidence in its long term value moving forward. The deal terms, therefore, aligned incentives to reward Rhode’s track record while still managing risk. To arrive at a similar outcome, dealmakers must keep in mind that rigorous corporate and financial due diligence and clear contractual structuring continue to be essential during the deal process.
Considering Legal and Regulatory Compliance
Transactions of this scale will almost certainly attract attention from antitrust enforcement authorities, or similar regulatory authorities, particularly in light of Rhode’s recent retail debut at Sephora and e.l.f.’s plans to expand Rhode into new territories, including Brazil. This billion-dollar sale reminds dealmakers to explore and meet all applicable legal and regulatory compliance processes to avoid issues. For instance, antitrust compliance procedures, including filings under the Hart-Scott Rodino Act, may require e.l.f. to demonstrate how the deal benefits consumers while having little effect on existing competition in the market.
Intellectual Property and Brand Identity Maintenance as Deal Drivers
Brand identity is a critical asset in beauty M&A that cannot be overstated, and intellectual property (IP) due diligence is a crucial first step to protect brand identity. Particularly for e.l.f. as the buyer, a top priority during diligence was to confirm that Rhode’s trademarks, copyrights, and other IP rights are secure, transferable and free from encumbrances to safeguard the value of the brand post-acquisition.
In addition, Bieber’s celebrity endorsement has cultivated a loyal following for Rhode, a testament to the power of celebrity branding in today’s beauty market. Bieber will remain actively involved in Rhode post-closing as Chief Creative Officer and Head of Innovation, which will help ensure continuity and reflects overall best practices in preserving brand authenticity. The e.l.f. Beauty team will also have the opportunity to further leverage her influential personal brand to expand Rhode’s global footprint. These hands-on roles assumed by Bieber post-closing demonstrate how real involvement by founders of an acquired company in operations and development is becoming increasingly more common.
While founder-led brands, especially celebrity-founded brands, are certainly an enticing target in today’s turbulent M&A market, these brands, like Rhode, need to increasingly show they can succeed outside of their star-studded bubble. Rhode’s minimalist aesthetic, social media-driven marketing and roadmap for longevity, including expansion into makeup and body care and selective retail partnerships, prove that it can stand out in a crowded field. For e.l.f., the acquisition was proven to not just center on Bieber and her products. Rather, it’s about acquiring a brand narrative, customer trust, a well-executed brand strategy and cultural prestige, and with e.l.f.’s 20-year industry expertise, Rhode is well-positioned for continued expansion.
The recent excitement behind the Rhode acquisition is a clear case of how M&A can accelerate brand growth and innovation, but it also carries risks of brand dilution or loss of authenticity, especially when niche brands are absorbed by larger conglomerates. Maintaining Rhode’s distinct voice and product will be essential for e.l.f. to realize the full value of the acquisition, which will require a thoughtful, curated approach to the ever-changing beauty market and the long-term M&A environment.
M&A Outlook After Rhode
As beauty companies race to capture new demographics and global markets, the Rhode transaction reminds dealmakers that compelling blueprints for M&A still exist. In fact, industry experts predict Rhode will help shed industry skepticism running rampant from inflationary pressure and wavering consumer confidence that have contributed to a slowdown in significant deals. Instead of caution, the billion-dollar sale of Rhode aims to raise the bar to support other beauty deals on the horizon. In such cases, Rhode provides solid examples of how robust due diligence, legal and regulatory compliance, vigilant IP protection and a deep appreciation for the intangible assets that drive consumer loyalty can lead to success. In an era where brand equity can make or break a transaction, the Rhode deal sets a benchmark for the industry’s next wave of transformative transactions.
For more information, contact KJK Corporate & Securities attorneys Alex Jones (AEJ@kjk.com; 216.736.7241) or Samantha Cira (SMC@kjk.com; 216.736.7232).