Colgate Takeover Odds Rise Amid Megamergers: Real M&A

Colgate’s Appeal Increases
A Colgate acquisition would overtake Procter & Gamble Co.’s $57 billion purchase of Gillette Co. in 2005 as the largest deal in the household-products and cosmetics industry, according to data compiled by Bloomberg. Photographer: Andrew Harrer/Bloomberg

In the year of the megamerger, even a $60 billion toothpaste giant isn’t too big to wind up on someone’s shopping list.

Colgate-Palmolive Co. is in an enviable position as oral-care products become increasingly sought-after in developing nations, where the company already generates half its sales. Its revenue is set to climb faster than every peer over the next few years, including Unilever and Johnson & Johnson, which analysts consider the most logical suitors.

Megamergers -- deals of more than $20 billion -- have hit a record $788 billion this year. In the consumer-products industry, the need for growth and scale is bringing together rival foodmakers such as Tyson Foods Inc. and Hillshire Brands Co., as well as cigarette producers and brewers. Colgate would fit with that theme and offer a buyer leading brands.

“When you look at potential targets, you look at the desirability of that target, what they have in terms of brands and products, do they have emerging-market exposure, and do they have something unique and differentiated,” Jack Russo, an analyst at Edward Jones & Co., said in a phone interview. “Colgate would pass a lot of those tests.”

While its size limits the number of potential acquirers, “we’ve seen so many large M&A transactions this year that nothing would surprise me,” Russo said.

PE Attention

Even a private-equity firm such as 3G Capital could be drawn to Colgate for the chance to milk out any extraneous costs, according to shareholder YCG LLC. New York-based 3G Capital teamed up with Warren Buffett’s Berkshire Hathaway Inc. last year to acquire ketchup maker HJ Heinz Co. for about $23 billion.

A representative for 3G Capital declined to comment on whether it’s interested in Colgate. Representatives for New York-based Colgate and London- and Rotterdam-based Unilever also declined to comment. A representative for J&J in New Brunswick, New Jersey, didn’t respond to a phone call or e-mail seeking comment.

A Colgate acquisition would overtake Procter & Gamble Co.’s $57 billion purchase of Gillette Co. in 2005 as the largest deal in the household-products and cosmetics industry, according to data compiled by Bloomberg.

Many of the world’s biggest tobacco, telecommunications, cement, cable-TV and drug companies are consolidating as internal growth opportunities start to run dry. Some of those deals have been driven by American companies attempting to redomicile to lower their taxes, a strategy that government officials are trying to prevent.

That wouldn’t be a concern in a takeover of Colgate, as long as the potential acquirer doesn’t seek to move its legal address.

Attractive Distribution

The maker of Total toothpaste would make sense as a buyer or seller because another company’s products could be distributed globally through Colgate’s channels, according to Ali Dibadj, a New York-based analyst at Sanford C. Bernstein & Co. Unilever and J&J are among those that could benefit from gaining either complementary products or distribution, he said.

Unilever, valued at $123 billion, is twice the size of Colgate, while J&J’s $303 billion market value trumps both.

“Colgate has a really fantastic distribution system,” Dibadj said in a phone interview. “So if you have great categories for emerging markets but don’t have the distribution, Colgate would be a fantastic candidate” to merge with, he said, adding that its size is the challenge.

Unilever’s Position

Earlier this year, analysts from ING Groep NV wrote in a research report that Unilever should be bolder in putting its “lazy” balance sheet to work. They suggested it could buy Colgate.

Unilever’s ratio of debt to earnings before interest, taxes, depreciation and amortization was 1.5 as of June 30, compared with an average of 2.6 for companies in the Standard & Poor’s 500 Index and 3.1 for those in the Stoxx Europe 600 Index, data compiled by Bloomberg show.

European companies have been chasing deals that promise growth and an escape route from the crisis-ridden region. Colgate offers the chance to gain a business that generated about half of its $17 billion of revenue last year in Latin America, Asia, Africa and Central Europe.

“If I were a Unilever or somebody, I’d look longingly at Colgate,” Luke Sims, chairman of Milwaukee-based Sims Capital Management LLC, which owns Colgate stock, said in a phone interview. “I don’t think you could find a better managed company. It’s very desirable.”

Premium Need

Because Colgate’s long-term prospects are so attractive, Sims said he doesn’t see a reason for the company to sell unless it received an offer for about $90 a share, or more. That’s at least 39 percent higher than Colgate’s average price in the past 20 trading days.

Today, Colgate shares rose 1.3 percent to $66.23, the highest since July.

“You have rising middle classes in China, India, Africa and other places throughout the world, and as people move up the income scale there’s a huge tailwind for Colgate in the kind of products that it sells,” Sims said.

In addition to its namesake toothpaste and toothbrushes, Colgate sells Irish Spring soap, Lady Speed Stick deodorant and Palmolive dishwashing detergent. The company has come under scrutiny for using triclosan, an antibacterial chemical, in its Total toothpaste because it has been linked to cancer-cell growth and disrupted development in animals. Colgate isn’t accused of wrongdoing.

Margin Room

While Colgate already generates high margins, there still may be room to cut expenses, which is something 3G Capital has expertise in, said Brian Yacktman, Austin, Texas-based chief investment officer of YCG, which owns Colgate shares among the $315 million it manages.

Colgate earned about 20 cents of operating profit on each dollar of sales in the past 12 months. That tops the margins for household-products makers larger than $30 billion except for Reckitt Benckiser Group Plc, which earned 26 cents, according to data compiled by Bloomberg.

3G Capital, run by billionaire Jorge Paulo Lemann and his partners, is known for finding ways to slash costs at the businesses it buys. The firm was behind the 2008 merger that created Anheuser-Busch InBev NV, the world’s largest brewer, and helped boost the company’s operating margin to more than 30 percent from about 25 percent.

There’s also room to increase Colgate’s leverage ratio -- 1.5 as of June 30 -- with a buyout by 3G Capital, Yacktman said.

“The reason I think this could be a real possibility is the fact that they’re so underleveraged,” he said. “It’s very rare to find a typical corporate culture that can’t cut fat. There’s always stuff that could be cut.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE