The Emancipation of Huda Beauty
Inside the Buy-Back: Deal Structuring, Funding TSG’s Exit and Splitting Off KAYALI to regain full control of Huda Beauty.
Last week, Huda Beauty bought back TSG Consumer’s minority stake in the company. The transaction was funded by the sale Huda Beauty’s KAYALI fragrance business to General Atlantic and co-founder Mona Kattan, transforming Huda Beauty and KAYALI into two separate companies.
General Atlantic’s press release announcing the KAYALI investment notes that Huda Beauty would “redeem” TSG’s shares, providing a clue as to what transpired.
A $1.2bn valuation will come with strings attached
TSG acquired its minority stake in Huda Beauty in December 2017 at an estimated $1.2bn valuation, just four years after Huda Beauty’s launch. Founded in Dubai by Iraqi-American beauty influencer Huda Kattan, it was a rare regional business getting global attention and Huda was one of the first beauty bloggers to raise significant private equity capital.
While this is a guess, the capital likely took the form of preferred equity with three key features common for growth equity minority investment:
a preferred dividend;
a liquidation preference; and
TSG’s seven-year hold suggests that the investment didn’t go according to plan
Revenue data for Huda Beauty is scarce, yet industry estimates show sales grew from about $200m in 2017 to $300-400m in 2018 and roughly $400m in 2019. Pandemic effects make 2020 opaque, with sources ranging from $250m to above $500m, depending on whether figures reflect wholesale or retail sell-through. Demand for color cosmetics then cooled, and most reports point to a pull-back to about $250m in 2021. Momentum returned in 2022, and one source now pegs the 2024 run-rate near $450m.
Growing from $200m to $450m over seven years implies a 12% revenue CAGR - solid but probably below the original business plan. Another tell-tale sign of internal challenges with an investment is leadership churn. After TSG invested, the company hired industry veteran Nathalie Kristo as President of North America in 2018, elevating her to CEO in September 2020 while Kattan became Chair. Kristo stepped down only seven months later.
Meanwhile, the preferred dividend keeps compounding1, increasing the value of the preferred equity and eating into Huda’s share of the company.
The ability to exit an investment is one of the important parts of a private equity investment thesis, perhaps only second to delivery strong returns. Because TSG lacked control, a redemption right can play a critical role in exerting pressure for an exit. A redemption right allows the preferred shareholders (in this case, TSG) to require the company to repurchase their shares at their then accreted value including the preferred return, offering a path for liquidity if an exit is delayed or uncertain. Not complying would trigger a default and force a full sale.
The threat of redemption, together with the accrued dividends and liquidation likely pushed both side toward the twin transaction.
Denouement
Known for sharing her successes and challenges with her followers, Huda posted a video on her youtube channel titled “I CAN'T BELIEVE WE JUST BOUGHT HUDA BEAUTY BACK!” The video kicks off with audio voice-overs: “As of today we are one of the only completely privately held companies” (in the beauty industry), “I felt like a fish in a shark tank,” and “I literally don’t have to answer to anyone,” followed by a graphic proclaiming “The Emancipation of Huda Beauty,” a telling choice of words. In the six minute testimonial, she recounts her founder journey, her experience bringing in investors (without naming TSG), and ultimately shares that she was not ready to sell her business outright to create an exit for TSG. While it’s clear that things didn’t work out, she is gracious with her former investors throughout the video.
Huda could have simply swapped TSG out with another investor, but it’s clear that reasserting full control of her company was critical to her.
Huda and Mona now each have their company
The end result is that Huda has regained sole ownership and decision making at Huda Beauty, but will need to self-fund her growth plans from hereon.
Meanwhile, her sister Mona will continue as CEO of KAYALI, but with General Atlantic as co-owner. There is no mention as to who has control but we can assume that the Kattans and General Atlantic will have learned from the TSG experience.
We don’t know how much money TSG made or lost on its investment in Huda Beauty. For what it’s worth, however, TSG has scrubbed Huda Beauty from its website and even pulled the original 2017 press release, as if the deal had never happened.
For illustration: 10% compounded over seven years is 1.95x the starting amount.