Glenboden M & A Originations

Potential acquirors for Sara Lee’s European homecare and personal care businesses

Priority Rating priority rating 2
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Origination Status press rumours based on company sources, March 2009
Asset Sara Lee’s international household and body care division (mostly Europe)
Buyer candidates include Unilever, Colgate-Palmolive, Reckitt Benckiser, SC Johnson
Seller Sara Lee Corp. (USA), global branded consumer products maker
Buyer Rationale synergies, brands, scale, portfolio development
Seller Rationale strategy of exiting low-growth, low-margin, uncompetitive businesses
NBs Sara Lee has hired Goldman Sachs to sound out potential bidders for the business
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In spite of strategic divestments and turnaround plans, Sara Lee is still struggling to succeed financially as a public company. It’s international homecare and personal care business is forecast to have flat sales in FY 2009, and to decline in operating profit terms by up to 15%. This is bleaker than the group’s forecasts for its other divisions, and sets that business up as a prime divestment candidate. There will be a lot of buyer interest in such a well-established portfolio of brands.

Sara Lee’s total sales crept up by 3% in H1 2008, to reach US$ 6,7. However, operating profit is still unacceptably low, with an estimated EBITDA margin of no more than 10%. Within those numbers, the homecare and personal care division’s sales fell by 5%, and its operating income, even adjusted for unfavourable currency movements, declined by 8%. Lower volumes and higher costs are to blame.

This division of Sara Lee contributes only about 15% of total revenues, when the group’s most core activities are in north American bakery, retail and foodservice as well as international beverages. At the same time, Sara Lee’s strategic growth plan, announced in late 2008, states categorically that under-performing businesses, with weak competitive prospects, will be exited from. More recently, the group has pointed to Europe as a geography suffering from weakening economies. So, the ingredients are there for a divestment.

In terms of sales pitch highlights, this business unit includes a number of internationally well –recognised brands in air care, body care, shoe care and insecticides. This makes it a very attractive portfolio for all of the major non-food FMCG players in Europe, although current economic conditions are likely to temper the valuations offered in any tender.

The usual suspects have already been tipped as buyers, including Unilever, Reckitt Benckiser, SC Johnson and Colgate-Palmolive. All of these companies will have strong commercial rationale for acquiring the Sara Lee business; the point of differentiation may be which one has the most financial clout now.

Unilever is by far the biggest; its home care and personal care divisions had combined sales in 2008 of about 18 bln GBP. Sara Lee’s portfolio would increase this by an easily-digestible 10%; in fact the addition of these major brands might be the stimulus for further portfolio rationalization by the group. Financially, with net debt of 8 bln GBP, giving an EBITDA ratio of 1,0, Unilever would have no problem in funding this acquisition.

Colgate-Palmolive derives about 50% of its US$ 15 bln sales revenue from personal care and homecare products, making it quite small compared with Unilever. Besides which, the group seems more focused now on developing its largest division, oral care, especially in developing geographies. We think it’s unlikely they’d want to compete with a determined Unilever for this acquisition.

Similarly Reckitt Benckiser, with total revenues of just under 7 bln GBP in 2008, is a much smaller entity than Unilever, and one whose growth is heavily focused now on the OTC market, after its 2 bln GBP acquisition of Boots Healthcare in 2006.

More of a surprise might come from SC Johnson, a private US business that’s particularly strong in surface cleaners, air-fresheners and insecticides. The Sara Lee homecare portfolio would fit well alongside this. One option for Johnson would be to construct a joint bid, with perhaps Beiersdorf taking over the personal care brands side of the business.

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THIS LEAD'S VALUATION
Size (€ mln) 2.300
Sector home and personal care
Asset Quality Europe branded portfolio
Seller large plc
Buyer large plc
P/S 1,5
P/Ebitda 7,5
Type value estimate
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