China Fosun is looking for beauty in all the wrong places

The Body Shop logo sits on the lids of body butter moisturiser inside a Body Shop International Plc store, owned by L'Oreal SA, in London, U.K., on Thursday, April 6, 2016. Photographer: Chris Ratcliffe/Bloomberg via Getty Images

Fosun International Ltd. is looking for beauty in the wrong place.

The Chinese conglomerate has joined the $900 million auction for The Body Shop, the British skincare chain owned by L’Oreal SA, according to The Financial Times.

It’s a sign that Fosun, which generated $11 billion in revenue last year from steelmaking to circus troupes, is feeling better about pursuing international deals after hitting the pause button on an acquisition spree that saw it scoop up more than 20 firms in two years.

The pullback came after a government clampdown on outbound investment, as well as the detaining of Guo Guangchang, Fosun’s founder and chairman, by Chinese authorities for questioning. Fosun’s stock has been heading south since touching a record high in May 2015 of HK$19.98, but is up 17 percent this year.

The question, though, is what does Fosun see in a decaying European store chain?

There’s a reason why global beauty giant L’Oreal is getting rid of The Body Shop, which makes up 4 percent of its total sales. For one, L’Oreal probably sees little future in an operation dependent on some 3,000 brick and mortar locations at a time when physical retailers in the U.S. and Europe — and the shopping malls that house them — are struggling. L’Oreal doesn’t want to stick around for the ride, and neither should anyone else.

The Body Shop auction

800 million euros

It is true that beauty is a standout among an otherwise dour retail sector. But it’s not like The Body Shop is a high-profile luxury name akin to Gucci or LVMH, sought after by brand-conscious Chinese consumers. It’s a mass market, middle-of-the-road mall chain that long ago lost any cachet it had for being one of the only places shoppers could buy chemical-free beauty products or fair-trade cosmetics.

The terms that The Body Shop popularized, such as all-natural beauty, now seem trite and common. What’s more, European and North American beauty companies are generally falling out of favor with Chinese consumers who are shifting to South Korean brands, even if that trend has been briefly interrupted by political spats.

The Body Shop’s numbers don’t look pretty, either. Revenue fell by 4.8 percent in 2016 as L’Oreal’s overall top line grew 3.8 percent. Operating margins at The Body Shop fell to 3.7 percent in 2016, from as high as 9.1 percent in 2012.

Plus, it’s not like The Body Shop is going cheap. At $900 million, or about 1.1 times revenue, the price tag is in line with the historical average for specialty retailer takeovers. Fosun is pitting itself against a slew of private equity firms, including one that’s teamed up with the investment vehicle of Alibaba Group Holding Ltd. founder Jack Ma. That could drive up the price if a bidding war ensues.

Fosun should bow out of this pageant gracefully, and search for a better-looking deal elsewhere.

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Bloomberg