Unilever's $3.7 billion move to acquire U.S. hair-care and skin-care manufacturer Alberto-Culver (NYS:ACV) may force European trade buyers and private-equity firms to target U.S. consumer-products company Church & Dwight Co.
The list of potential buyers for C&D, which has a market capitalization of $4.5 billion, is led by U.K. household product maker Reckitt Benckiser. Despite possible operating earnings dilution, such a tie-up could be justified and offset by potential cost savings. It would mean continuity in Reckitt's approach to mergers and acquisitions, with the company of late having opted for lower-margin businesses such as SSL International in the U.K., and would help it bulk up in the U.S., which accounts for 25% of sales.
C&D's products would complement Reckitt's laundry portfolio with the addition of brands like Arm & Hammer and Xtra. It also complements SSL's brands by adding Trojan condoms and ORAJEL oral analgesics. One caveat is that another deal would require precious management time when it is focused on the recent SSL deal.
Reckitt could face competition from private-equity firms or Procter & Gamble (NYS:PG) , which has been on the M&A hunt for some time. Private equity in particular should realize the financial logic of a C&D acquisition, with the company offering steady operating cash flows, light capital-expenditure needs and a balance sheet that begs for leverage.
What other buyers could show up from Europe? Rule out Beiersdorf (FRA:DE:BEI) as too small and conservative to compete, and the spotlight turns to L'Oréal (PAR:FR:OR) and Henkel & Co. L'Oréal is a less-than-obvious pick, but the French cosmetics company may take a look at M&A as a way to commoditize its high-end brand portfolio and push into the U.S. For Henkel, any $4 billion-plus deal would be a significant stretch, so the German company might first want to rationalize its portfolio and look to part with a portion of its adhesive business.
The rationale of a C&D deal could follow the financial logic of Unilever's acquisition of Alberto-Culver. It may appear that the company is paying a full price at a rich 14.8 times trailing earnings before interest, taxes, depreciation and amortization. But assuming Unilever can squeeze savings of between 8% and 10% of Alberto-Culver's revenue, the multiple drops below 10 times trailing earnings. At the top end of the range, implied synergies, once taxed at 30% and capitalized at 10%, are well above the premium being paid on Alberto's unaffected share price.
All told, it makes a good template for European buyers looking to expand their profit pool into a mature but key consumer market like the U.S.
Alessandro Pasetti and Jacob Plieth
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Think Again uses material from Dow Jones Investment Banker. For more information, visit www.dowjones.com/banker.