Unilever (UL) recently received regulatory approval from the European Union for the acquisition of Sara Lee’s (SLE) Personal Care and European Laundry business for $1.87 billion. Unilever competes with a hosts of companies in the food and personal care segments like L’Oreal (LRLCY.PK), Avon (AVP), Proctor & Gamble (PG) and Estee Lauder (EL) Sara Lee (SLE) and Nestle (NSRGY.PK).
The EU will require Sara Lee to sell its Sanex deodorant brand to address antitrust concerns gives its strong portfolio of Axe and Rexona deodorant brands. The deal also brings with it, regional product category leaders such as Biotex in Laundry, Zwitsal and Fissan in Baby Care, and Prodent and Zendium and Oral Care.
The Trefis price estimate is $38, which is around 23% ahead of the current market price.
We estimate that food and consumer products contribute roughly half of Unilever’s value while home and personal care products account for the remainder of items sold.
Expansion of Unilever’s products to a wider price range
Sara Lee’s Radox, Duschdas and Neutral brands would complement Unilever’s Dove, Axe and Rexona brands at a lower price point. We believe these acquired brands appeal to different consumers than its incumbent brands and so do not pose much of a threat in terms of cannibalization. With the acquisition, Unilever is building out its brand portfolio to appeal to a wider audience in more markets across the globe.
We believe this helps in the following ways:
- Expansion into products across price bands makes Unilever more immune to macroeconomic downturns such as the one witnessed in 2008-09.
- During recessionary times, characterized by rising unemployment levels and reduced disposable income levels, consumers substitute personal care products with lower-priced brands and being present across price brands helps maintain volumes and consequently market share.
- Lower-priced brands are also better equipped to compete with private labels and regional players, thereby gaining market share in the process.
Leads to Market Share Gains
Acquisition of Sara Lee’s Body Care and European Laundry business strengthens Unilever’s market share in key European markets such as Britain, Germany, France, Spain, Italy, Denmark and the Netherlands.
How Does Europe Fit In?
- The global household and personal care industry is expected to grow at over 3% YOY. Much of this growth (and that too in double digits!) is expected to come from emerging markets in Asia and Latin America on account of rising disposable income levels and high population growth rate.
- Nevertheless, Europe continues to be a much larger market for household and personal care products contributing to over 40% of global revenues. 
- Despite a low population growth rate and little scope for volume growth, the mature markets of US and Europe continue to grow primarily by offering value-added features that justify a higher prices.
- The acquisition helps Unilever gain market share in a significant market such as Europe. We expect the sheer size of European household and personal care market to compensate for the low growth rates.
While the acquisition is expected to lead to an immediate gain in Unilever’s market share, much of the value from the acquisition would be unlocked when synergies in the operations are realized over the long term. We believe the EBITDA Margins could suffer as the businesses are integrated and product mix shifts (over 2010-12), but this should recover as the company finds synergies and scale help
- Home Care Industry Overview, Wirpro Company Website
Disclosure: No position