Dec. 16 (Bloomberg) -- Kao Corp., Japan's largest household goods maker, said it will buy Kanebo Cosmetics Inc. for 279 billion yen ($2.4 billion) from a government bailout agency to boost earnings in the world's second-biggest cosmetics market.
Kao and three buyout funds, Advantage Partners LLC., MKS Partners Ltd. and Unison Capital Inc., submitted the highest bid, according to statements released today by the Industrial Revitalization Corp. of Japan and Tokyo-based Kao.
Acquiring the maker of T'Estimo lip gloss and Revue foundation will triple Kao's sales of makeup and help it challenge Shiseido Co. in Japan's $12.4 billion cosmetics market. Kao plans to complete the transaction in February. Kao said it will also use Kanebo to expand in Europe and the U.S.
"Kao's growth potential in cosmetics'' was limited because it lacked strong brands, said Keiko Yamaguchi, an analyst at Nomura Holdings. Kao said in July it would buy Molton Brown Ltd., a U.K. maker of cosmetics and luxury consumer products, to expand its cosmetic business abroad.
Yamaguchi also said Kao may benefit more from Japan's economic recovery in the cosmetics business than from selling toiletry products. Consumer spending in Japan rose for three straight quarters this year as households earned higher wages.
Kao said earlier this year that prices of its toiletry products were continuing to fall because of competition.
"This transaction will help us expand in the cosmetics business, where there is high growth potential,'' Motoki Ozaki, Kao's president and chief executive officer, said at a press conference in Tokyo. Consumers are seeking a greater variety of products, portending ``rapid change'' in the cosmetics business, he said.
The Industrial Revitalization Corp. of Japan is selling 86 percent of Kanebo Cosmetics and 31.9 percent of the voting rights in its former parent, Kanebo Ltd.
The bailout agency last year provided 366 billion yen to revive Kanebo Cosmetics. The money was used to buy the stake and provide 130 billion yen of loans. Kanebo Ltd. had posted five years of losses.
The IRCJ paid 86 billion yen for its 86 percent Kanebo Cosmetics stake in March and 20 billion yen for a 32.11 percent stake in Kanebo Ltd. in May. The agency said Kanebo group has debt of 167 billion yen.
The Kanebo sale is the last major transaction for the IRCJ, set up in April 2003 with a two-year mandate to bail out distressed companies.
The revitalization agency helped rescue 41 groups of companies, including Daiei Inc., once Japan's biggest retailer, and Daikyo Inc., the country's largest condominium builder.
The agency had purchased 271.8 billion yen of equity in companies and provided 382.1 billion yen of loans as of March 31, when it stopped looking for bailout candidates. It will be dissolved by early 2008 after completing the sale of stakes in companies already under its charge.
The agency began assessing bids from as many as 10 companies for Kanebo in August. In an earlier round of bidding, Johnson & Johnson submitted an offer, according to Manabu Hirano, director of human resources and administration in Japan for the world's largest maker of medical devices.
L'Oreal SA, the world's largest cosmetics maker, decided not to make an offer after examining the Japanese company's accounts. L'Oreal couldn't find ``enough synergies'' with Kanebo, the Paris-based cosmetics maker said in September.
Kanebo Cosmetics had sales of 156 billion yen in the first nine months of 2005. The company is forecasting full-year annual sales of 197 billion yen, up from 145 billion yen a year earlier, according to its Web site. Kao's cosmetics division had sales of 78 billion yen in the year ended March 31.
Kao, which started selling soap in Japan in 1890, makes Biore facial cleanser and Attack laundry detergent.
Japan's cosmetics market, second that of the U.S., was valued at 1.4 trillion yen in the year ended March 31, according to Machiko Amano, an analyst at Standard & Poor's in Tokyo.
Kanebo Ltd. owns the remaining 14 percent of Kanebo Cosmetics, which in turn owns 37.9 percent of its former parent. Kanebo Ltd. expects sales to drop to 140 billion yen in the year ending March 31, from 269 billion yen a year earlier, as it sells businesses to reduce debt.
Shares of Kanebo Ltd. stopped trading on the Tokyo and Osaka exchanges on June 13 after the company said management overstated earnings by 210 billion yen over five years.
Kao shares rose 20 yen, or 0.7 percent, to 3,120 at the close of Tokyo Stock Exchange trading. The announcement was made after the market closed.
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