Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

With 3G Capital, Warren Buffett, Nelson Peltz and Bill Ackman all congregating around some of the world's biggest consumer-products companies, toothpaste -- of all things -- has become a hot commodity. 

Colgate-Palmolive Co., the largest maker of oral-care products globally, jumped more than 2 percent Wednesday as takeover speculation swished around once again. Ian Cook, CEO of the $63 billion company, is said to be open to the idea of selling the toothpaste giant should any suitors be willing to pay $100 a share, according to a New York Post article that cited a recent meeting between Cook and some unnamed investors.

Whisper Price
Colgate CEO Ian Cook has reportedly floated a suggested takeover price for his company of $100-a-share, which equates to an almost 40% premium. Will there be any takers?
Source: Bloomberg

Colgate's stock had been trading around $72, so the price tag Cook's reportedly seeking would be a big markup for a business that's been experiencing declining sales. The company's price-to-earnings ratio based on profit expectations for the next 12 months is also already higher than most of its peers'. 

Sell High
Colgate's stock is commanding an elevated valuation relative to its historical range and peer group, which has its CEO warming up to the idea of a sale of the company
Source: Bloomberg

So how realistic is a deal? There's no question that the biggest players in consumer  products are struggling to find growth opportunities and it's driving M&A in the space. Kraft Heinz Co., which is backed by 3G and Buffett's Berkshire Hathaway Inc., is already seeking its next megamerger after mac-and-cheese maker Kraft merged with ketchup king H.J. Heinz two years ago. Kraft Heinz had its eye on Europe's Unilever this year, but those efforts failed when the early-stage discussions leaked out and ruined the chance for a friendly deal, which Buffett insists upon. 

Colgate has frequently come up since then as a possible target for either Kraft Heinz or Unilever. For Kraft Heinz, that would mean expanding beyond food items. The idea becomes more palatable when put in the context that Kraft Heinz's closest rivals may be effectively taking themselves out of the running for a 3G-driven deal. General Mills Inc. and Mondelez International Inc. have been copying the cost-cutting playbook used at Kraft Heinz, which would leave less for 3G to do and produce smaller post-merger returns. (Although, General Mills hasn't been quite as successful with the strategy.)

This is partly why the attention has shifted to non-food companies with more bloated operations, such as Unilever and Colgate, which until now have been able to tiptoe around activist investors and deal vultures. Unilever, in theory, could buy Colgate to bulk up its household and personal-care business as a precursor to selling off its food operations. But the odds of that happening have diminished as it focuses on expanding margins and streamlining the conglomerate. Plus, there are the politics around Europe-U.S. mergers, especially should both regions become more protectionist.

Sales Slide
Colgate has struggled with revenue growth, though Latin America remains a bright spot and accounts for about a quarter of its sales
Source: Bloomberg

Colgate's assets also could attract Johnson & Johnson and Procter & Gamble Co. J&J's acquisitions -- including Actelion Ltd., the biggest U.S. takeover of the year so far -- have been geared toward enhancing its pharmaceuticals exposure as it tries to downplay the scant growth in its smaller consumer-products unit. J&J owns big skincare brands such as Neutrogena and Clean & Clear, as well as Listerine mouthwash, which is an obvious fit with Colgate. 

The issue of reduced competition is where these grand consolidation ideas begin to fall apart. That's why it's difficult to envision a deal between P&G and Colgate, which are direct competitors in areas including oral care. P&G owns Crest and Oral-B, which have a bigger market share than Colgate in North America. Peltz's Trian Fund Management LP, the activist that long pursued a breakup of PepsiCo Inc. and has agitated for changes at other big companies, recently disclosed a stake in P&G -- albeit a passive one -- worth about $3 billion. That got some investors thinking.

Long in the Tooth
Colgate has a larger international presence than P&G, whose brands dominate in the U.S. The stronger growth opportunities offered by some foreign markets may appeal to suitors.
Source: Bloomberg Intelligence, Euromonitor International

Could it be that Colgate gets broken up and its assets divvied up among multiple buyers? Perhaps, but a takeover seems like the first step. It would be a large, expensive and debt-heavy acquisition for any of the aforementioned companies, but the synergies would be significant. And at a time when sales are stuck or going in reverse, that's enough to drive a Colgate-sized bid. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net