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By Alexandre Boksenbaum-Granier and Donny Kwok
PARIS/HONG KONG (Reuters) - L'Oreal SA <OREP.PA> has offered to buy Chinese facial mask maker Magic Holdings International Ltd <1633.HK>, a move that would put the world's largest cosmetics group in the lead of the fastest growing sector in China's $15 billion skincare market.
China is the third biggest market for cosmetics in the world as well as for Paris-based L'Oreal's products.
Magic Holdings has the biggest market share in the facial mask market, a sector expected to grow more than 35 percent in the next two years, exceeding the 27 percent expansion in the overall skincare market, according to data from consumer research firm Euromonitor.
L'Oreal's HK$6.54 billion ($840 million) takeover offer for Magic Holdings, equivalent to HK$6.30-per-share, would be a small price to pay to expand in such a high-growth segment, said Summer Wang, Hong Kong-based analyst at BOCOM International investment bank.
The offer values Magic Holdings at 9.1 times its last fiscal year sales. L'Oreal trades at 7 times its 2012 sales.
"L'Oreal just needs to spend a small amount of money and can take over China's biggest facial mask player," Wang said. "Through this deal, it can fast-track its market share in this segment and the valuation is cheap."
China's cosmetics market is expected to grow 63 percent for the five years ending 2015 compared to flat growth for second-ranked Japan, according to consumer research firm Euromonitor.
In a joint statement, Magic Holdings Chairman Stephen Tang welcomed the L'Oreal offer. Magic shares surged as much as 21 percent to an all-time high of HK6.10 on Friday, beating a flat broader market <.HSI>.
"Six key shareholders, representing 62.3 percent of the company's equity, are already committed to supporting L'Oreal's proposal," the French company said in the statement. The deal is subject to approval from the Chinese Ministry of Commerce.
Magic Holdings, which has a market value of $676 million, had 288 distributors at the end of December, up from 261 in June last year. Its sales outlets stood at 12,471 at the end of December, up from 10,184 in June.
The company also expanded into e-commerce this year after buying an online distributor in May, which would give L'Oreal greater access to China's booming online retail market.
L'Oreal's offer represents a 25 percent premium to Magic Holding's last closing price before trading in the shares was suspended on August 12 to prevent speculation.
The deal is expected to be financed through L'Oreal's internal resources and a 650 million euro credit facility from BNP Paribas <BNPP.PA>, the two companies said in a joint statement. On completion, Magic Holdings shares are expected to be withdrawn from the Hong Kong stock exchange.
L'Oreal, which makes Garnier shampoo and Yves Saint Laurent perfume among other products, posted a 5.2 percent rise in quarterly sales last month, boosted by higher growth in newer markets such as the Asia-Pacific region.
The French company said Magic Holdings achieved sales worth 150 million euros in 2012, up 29 percent on the previous year.
Magic Holdings has two factories in southern China, with annual capacity of about 260 million pieces of peel-off masks and 12 million bottles of wash-off masks.
A new production facility which will go into operation by mid-2015, is expected to raise total capacity to about 400 million pieces of peel-off masks per year.
(Additional reporting by Alexandria Sage in PARIS and Alexandra Hoegberg in HONG KONG; Editing by Anne Marie Roantree and Miral Fahmy)