The New York-based cosmetics company will acquire Too Faced from private equity firm General Atlantic and expects the deal to close in December.
"We view the acquisition as sensible and consistent with EL's strategy of increasing its exposure to faster-growing channels (online, specialty-multi) and key demographics (millennials)," Jefferies wrote in an analyst note.
The Too Faced brand is targeted to millennials and Generation Z. Eighty-five percent of its consumers are under 40 years old.
Meanwhile, Estee Lauder's large legacy brands, such as its namesake brand and Clinique, are skewed to an older generation of women and comprise more than 40% of global sales. Given this demographic and declining sales at U.S. department stores, Estee Lauder's management has been focused on broadening the portfolio's appeal to millennials and the fast growing specialty-multi and online channels organically and through bolt-on mergers and acquisitions, Jefferies noted.
Estee Lauder also said there is opportunity for value creation through expansion in new and existing markets, including domestically, abroad and in travel retail.
"The deal multiple looks rich, though may be justified by Too Faced's strong growth and potential revenue synergies where EL has a strong track record of extending acquired brands across channels and geographies (e.g. MAC, LaMer, Bobbi Brown all grew at > 20% CAGRs during 1995-2015)," Jefferies said.
Too Faced is expected to reach net sales of more than $270 million in 2016, representing growth of more than 70% for the year, Estee Lauder noted.
KeyBanc Capital Markets was also upbeat about the deal. The firm said it likes the brand and the transaction, as it reminds it of the growth opportunity when Estee Lauder bought makeup brand Smashbox in 2010.
"Management sees the brand as a meaningful growth engine for EL moving forward: it has strong millennial and beauty enthusiast appeal and is a leader in the fastest growing category in global prestige beauty (makeup)," KeyBanc wrote in a note.
Estee Lauder, which also bought makeup brand Becca on Monday, reported first-quarter revenue that missed Wall Street's expectations and gave downbeat guidance in early November. The stock is down more than 12% year-to-date.