Japan's Shiseido agrees $1.7 billion U.S. cosmetics buy

TOKYO (Reuters) - SHISEIDO (JP4911.TK)Co Ltd, Japan's largest cosmetics company, has agreed to buy U.S.-based Bare Escentuals Inc for $1.7 billion, as it looks to revamp its global brand and expand in North America.

Shiseido, which began as far back as 1872 as Japan's first Western-style pharmacy, has been focusing on growth in China to offset a $24 billion home market that is shrinking as Japan's population ages.

Adding Bare Escentuals, a San Francisco-based cosmetics and skin care firm, would help Shiseido move into the fast-growing natural-ingredient cosmetics market, Shiseido said. Bare Escentuals would have lifted revenues at Shiseido last year by 8 percent and operating income by 36 percent.

Kao Corp, a rival toiletries and cosmetics firm that bought Kanebo in 2006 and British luxury skin care brand Molton Brown in 2005, is also looking for beauty-care product brands in the United States and Europe. Japan's third-ranked Kose has also said it would consider an overseas acquisition if the right deal came along.

Shiseido shares gained 6 percent on Friday to 2,058 yen, the stock's biggest rise in 6- months, outperforming a flat Nikkei average.

The acquisition could help strengthen Shiseido's presence in the competitive North American market and help it expand in Central and South America, said Ryosuke Okazaki, chief investment officer and senior vice president at ITC Investment Partners, an asset management arm of Itochu Corp.

"But investors are still trying to see if these two strong brands can help one another grow, without competing," he said.

Shiseido is offering $18.20 per share in the cash deal, a 43 percent premium to Bare Escentuals' last Nasdaq closing price.

Bare Escentuals, which markets natural-looking cosmetics and runs 800 retail outlets in the United States, will operate as a separate division of Shiseido and its brands will continue to be run by its CEO Leslie Blodgett, the companies said.

Shiseido, which earns 62 percent of its sales in Japan, has been selling $1,000 anti-aging face creams along with rivals Kao Corp and Kose Corp in the fast-maturing Japanese market.

"Shiseido is not a global player on natural-ingredient products, for which demand is growing," Shiseido President Shinzo Maeda said at a news conference. "By capitalizing on Bare Escentuals' strength in this area, we can expand our clientele."

Shiseido will consider more acquisitions overseas, but is not in any other talks now, Maeda said.

Some analysts cautioned that Shiseido may be paying too much for a brand that is little known in Asia and has limited room for further growth in the United States.

"Shiseido needs to target Asian countries for its sales and profits to grow, but it's not clear how Shiseido will expand its Bare Escentuals business in Asia," said Toshihiko Matsuno, senior strategist at SMBC Friend Securities. "I don't think I can justify a $1.7 billion acquisition price."

Shiseido said it would pay for the acquisition with 30 billion yen ($328.9 million) in cash and cash equivalent and a 150 billion yen bank bridge loan.

BofA Merrill Lynch is exclusive financial adviser to Shiseido, while Goldman Sachs is advising Bare Escentuals.

(Additional reporting by Chikafumi Hodo and Mariko Katsumura in Tokyo and Nick Zieminski in New York; Writing by Mayumi Negishi; Editing by David Dolan and Ian Geoghegan)

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