High Premium Privatization: L'OCCITANE presents shareholders with the best trading opportunity of the year

If you have always been a shareholder of L'OCCITANE (00973.HK), then accepting the group's cash privatization offer will be one of your most enjoyable Hong Kong stock trading experiences this year.

First of all, because the win rate is high. As of the announcement on July 1st, it is known that currently 47.66% of L'OCCITANE's independent shareholders have confirmed, accepted, recommended, or supported the privatization scheme. The offeror only needs to acquire no less than 90% of the shares held by independent shareholders before August 26th this year to confirm the privatization.

Secondly, the odds are also not low. The offer price per share is HKD 34.00, a premium of approximately 60.83% over the average closing price per share of HKD 21.14 in the 60 trading days before the undisturbed day.

It goes without saying how rare it is to have a high win rate and high odds in investment trading in the Hong Kong stock market this year. Many investors have summed up their stockholding experiences in the Hong Kong stock market in recent years with two words - "mentally exhausted." Despite the rebound of the Hang Seng Index in the first half of this year, it still broke through and failed to hold above 18,000, mainly due to the fundamental liquidity risk not being resolved.

Currently, L'OCCITANE's privatization can be said to bring a bit of comfort to the group's shareholders.

I. The necessity of privatization

On August 9, 2023, L'OCCITANE briefly halted trading, with trading suspended until the 14th. During this period, an announcement released by the group revealed that L'OCCITANE had long been planning privatization. After the news came out, the stock price of the group opened significantly higher on the first day of resumption, with a single-day increase of nearly 9 percentage points. Until today, L'OCCITANE's stock price is still being catalyzed by the news of privatization.

The market is extremely excited about L'OCCITANE's privatization, with many optimistic about it because the group's operations are not bad at all.

L'OCCITANE's main brand, L’OCCITANE en Provence, was born in 1976 and is a body care brand originating from Provence, with an average customer price of around 200 yuan, higher than its competitors by 40-50%, often referred to as the "Hermès of hand cream." The group also has 7 other brands, with business operations in 90 countries, covering multiple categories including body care, skincare, makeup, and fragrances.

It is easy to see that L'OCCITANE is an international group with globalized and multi-brand development. Because the group saw the consumption potential of China's mid-to-high-end beauty market, it chose to list in Hong Kong. Leveraging the huge consumption power of the Chinese market, in the year of its listing in Hong Kong in 2010, the group's revenue was only 600 million euros, but by the end of the fiscal year on March 31, 2024, the group's sales reached 2.54 billion euros (RMB 19.8 billion).

In less than 14 years of being listed, revenue has achieved a growth of over 300%, and the continuous expansion of scale has also kept L'OCCITANE in the top position in the global high-end hand care and body care market share.

Nevertheless, there is still a certain gap in market value between L'OCCITANE and comparable companies such as L'Oréal and Procter & Gamble.

In order to keep up with the industry trends, L'OCCITANE has acquired LimeLife by Alcone in 2017, ELEMIS in 2019, Sol De Janerio (SDJ) in 2021, and GA in 2022. The development trend of the industry requires continuous expansion, seeking economies of scale, reducing reliance on the main brand, and forming a synergistic development where the main brand is stable and new brands have high growth.

The competitive barriers in the beauty and personal care industry have shifted from single products to comprehensive, branded, and industry-ecosystem integration capabilities. Various beauty and personal care groups have followed this market trend. For example, L'Oreal has both the high-end Helena Rubinstein and the affordable Maybelline; Procter & Gamble not only sells various shampoos and conditioners but is also the parent company of the high-end skincare brand SK-II.

Following the footsteps of predecessors, L'OCCITANE's acquisition strategy is a necessary path for the long-term development of the group, but in the short term, it has a significant impact on performance fluctuations. Looking at L'OCCITANE's history of "buying spree," it hasn't been long enough for synergies to be generated between the various brands, and the sales network and marketing strategies are not mature. The Chinese market, which once contributed significantly to the group's performance growth of over 300%, now faces unimaginable complexity in consumer markets, posing significant challenges to L'OCCITANE's business environment.

With various unfavorable factors intertwining, the group's operational difficulty has increased, and profit pressure has significantly intensified.

For L'OCCITANE Group, in today's volatile market environment, privatization can allow the company to make decisions based on actual operational data rather than focusing on stock prices, enhance the company's financing capabilities in markets other than the stock market, and make corporate governance more flexible. It can help the company escape the pressure of capital market expectations, stock price fluctuations, and investor sentiment sensitivity.

For L'OCCITANE shareholders, accepting a cash exit plan means they do not have to bear the burden of the group's uncertain performance or worry about fluctuating stock prices.

II. Recommended Cash Plan

In this privatization, L'OCCITANE has provided a choice of two exit plans for a few shareholders. One is to choose HKD 34 in cash per share, and the other is to exchange existing shares for 10 shares of the new company after privatization.

Let's first discuss the less cost-effective option of exchanging shares for the new company. This new company is a private company that consolidates the group's main businesses. Holding shares in a private company carries higher risks compared to publicly listed companies, with almost no opportunity for freely buying and selling shares.

On the other hand, choosing the cash option of HKD 34 per share means you will receive a high certainty and substantial immediate return. Therefore, compared to the share exchange option, it is definitely more recommended that you accept the cash plan.

Firstly, the success rate is high. Generally, one of the key factors determining whether a Hong Kong-listed company can successfully privatize is the concentration of share ownership. L'OCCITANE's share ownership is very concentrated. The controlling shareholder of L'OCCITANE and the acquirer of this privatization already hold 72.63% of the group's issued and outstanding shares, and currently, nearly half (47.66%) of the minority shareholders have agreed to accept or recommend the tender offer (with 38.06% of shareholders having made irrevocable commitments to accept the offer) 9.60% of the shareholders have committed to recommend accepting the offer to their clients or provide non-binding support letters. As long as 90% of the offer shares held by non-related parties are acquired before August 26 this year, L'OCCITANE can confirm the privatization.

Moreover, the odds are not low. According to CICC's research report, the average premium for privatization cases in the Hong Kong stock market in 2023 is 29%. As announced on July 1, L'OCCITANE Group, as the acquirer, will privatize the company through a comprehensive tender offer, with an offer price of HKD 34.00 per share. This share price level represents a premium of approximately 60.83% over the average closing price of HKD 21.14 per share before the privatization favorable news.

To be honest, this price is already very sincere. Calculated by the offer price, the PE ratio reaches 63 times, and the group's valuation has never been so high. Based on the highest profit level of the 22-year performance, the PE ratio is also close to 20 times, which is relatively high among high-end consumer peers in the Hong Kong stock market, and higher than the group's expected valuation made by securities firms such as CICC and Citi.

Furthermore, the overall liquidity in the Hong Kong stock market has not shown signs of improvement, still trapped in multiple crises such as low valuation, weakened financing functions, and tight liquidity, with limited liquidity concentrated in a few leading companies.

In this context, for long-time L'OCCITANE shareholders, the premium level of this privatization transaction is very sincere, which can bring substantial one-time immediate returns and should be seized.

It is important to note that there is no room for further price changes, and it will not increase further. L'OCCITANE shareholders have less than a month to accept the cash offer, from July 2 to 23, so they should seize the opportunity.

III. Conclusion

Jesse Livermore once said, "Either you take immediate action, or you will be left behind by opportunities!"

At present, accepting the cash offer is a favorable investment opportunity for L'OCCITANE shareholders, which is both profitable and within an acceptable risk range. They should take decisive action