Glenboden M & A Originations

Six acquisition candidates for Unilever

Priority Rating priority rating 4
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Origination Status proprietory origination, May 2009
Asset LK Dr Irena Eris SA (Poland), leading independent domestic personal care brand
Buyer Unilever plc (UK /Holland), multinational FMCG group
Seller founders of Irena Eris
Buyer Rationale strengthening of personal care business, centre of excellence in CEE
Seller Rationale acceptable valuation, timing
NBs Unilever has cited personal care, CEE and vitality as strategic priorities
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Acquisition origination projects for Unilever tend to start by understanding what isn’t of interest to their massive portfolio, before moving on to defining what’s attractive. We try to streamline the process, identifying six acquisition options, in various categories and geographies. Priority has been given to businesses that provide new product technologies or provenance, and are ‘adjacent’ to the existing portfolio (to use a favourite Unilever term).

With net debt of 8 bln GBP, at the end of 2008, representing an EBITDA ratio of 1,0, Unilever has a lot of headroom for funding even large or several purchases.

Unilever is exiting high cost and unscalable businesses …

To start by summarizing types of business that aren’t interesting for Unilever. Certainly categories with high materials’ costs; witness the divestment by the group of its Igloo and Bird’s Eye frozen foods brands in 2006, and of the edible oils side of Bertolli in 2008.

Also, the group is happy to part with brands or categories that aren’t scalable from its point of view; hence the sale of Lawry’s cold sauces in the US, and of the French fresh cheese brand Boursin, in 2008.

... to focus on scalable assets in adjacent categories

That shifts the Unilever portfolio to assets that have low materials costs, so high margins if all else is well managed. Moreover, it puts the emphasis on businesses that are scalable for the group.

Since Unilever is so powerful at new product development and marketing, behind its existing brands and categories, in practice it’s only really interested in new businesses that provide an advantage that’s adjacent to where it already excels, not on top of it.

Rumoured acquisition targets have some shortcomings

In the public domain, Unilever is currently linked with the potential acquisitions of the European home care and personal care business of Sara Lee, as well as of Alpro Soya, the leading dairy alternatives brand in Europe.

However, although both of these businesses meet some of Unilever’s acquisition criteria, and have the advantage of being openly for sale, there may be less problematic options for the group elsewhere at this time.

The Sara Lee portfolio might provide some adjacent technology for Unilever, for example in the form of its Kiwi shoe polish business. However, a large part of the value proposition of that portfolio is its brands; Unilever might not want to pay a premium for new brands that overlap with its existing high-powered offering.

As for Alpro, in theory soya is the ‘next big thing’ as a dairy alternative, which is a colossal potential market. In practice however that market is still very small and slow-growing, and the organoleptic properties of soya milk are far from convincing. Maybe the consumer will simply consume more fruit and vegetables in future, as a substitute in any animal milk products decline ?

So what alternative acquisitions are out there for Unilever ?

Businesses that bring new technology could be prioritized ..

If Unilever's looking for adjacent assets, with new product technologies and high margins, then an obvious option is for the group to take a bolder step into age -related nutrition.

Major baby food brands in developed geographies are very expensive; witness the valuations paid, respectively, by Nestle for Gerber and by Danone for Royal Numico, both in 2007.

On the other hand, brands in that category in major developing countries are relatively cheap, in absolute terms at least. They also tick the additional box of constituting new geography expansion; that criterion, as witnesses by the acquisition last month of Baltimor cold sauces in Russia, is an M&A driver at Unilever.

One candidate in that space for Unilever is Nutritek in Russia. A significant player in that market, its product range and IMF offering are arguably stronger than any of its independent competitors. It also enjoys high growth in its domestic market, and is investing in expansion into Asia.

At the same time, it appears to be over-reaching itself financially, a problem set to be exacerbated by margin and liquidity issues as the Russian market matures.

Continuing on the new technology theme, how about something, in developed markets, that doesn’t cause a call to arms amongst big competitors ?

Arguably lacking in Unilever’s health & wellness story is fish –based Omega 3. Something beyond spreads, that could move the group into the lucrative area of nutritional supplements, in a credible way, as well as opening up new sales channels.

One option here is the Omega 3 assets of Galenica of Switzerland. That group is a diversified player in pharma products and distribution, with a provenance in iron deficiency. It made a push into Omega 3 in recent years, including the acquisition of Equazen, the leader in that category in the UK, in 2006.

However, Galenica has not fully capitalized on the potential of Omega 3 and, again, it could be that Unilever is better placed to commercialise the technology.

… as well as companies with a strong provenance story

Another acquisition theme, for Unilever, which arguably has as much potential going forward as technology, is that of provenance. That means products which can be positioned as authentic, in terms of ethnic origin or purity of ingredients or other features.

The development of Bertolli by Unilever, in Mediterranean cuisine, suggests that the group is bridging more into provenance now.

In that space one candidate is Wessanen in Holland. That group has experienced stagnant sales and low profitability in its ethnic and health businesses.

Its portfolio would add over € 600 mln to Unilever’s turnover in Europe and the US, and the group could better commercialise and mainstream it than Wessanen has until now. The US side of the business is already for sale.

Another, more high-growing tip, in terms of provenance and possibly technology, is Irena Eris in Poland. That personal care brand has a relatively strong R&D function, and squarely represents east European female beauty.

It’s also been performing well in terms of growth and profitability (see M&A Profile chart). Unilever’s recent purchase of TIGI premium hair care, in the US, suggests the group’s already focusing on such centres of excellence at this time.

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THIS LEAD'S VALUATION
Size (€ mln) 100
Sector personal care
Asset Quality Poland leader branded
Seller family
Buyer large plc
P/S 2,0
P/Ebitda 12,0
Type value estimate
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