Alberto Culver stockholders have approved an all-cash acquisition of all outstanding shares by the Anglo-Dutch consumer giant Unilever (UL) for $3.7 billion. Unilever competes with a host of companies in personal care segments like L’Oreal (OTCPK:LRLCY), Avon Products (AVP), Procter & Gamble (PG) and Estee Lauder (EL) among others. The merger currently awaits approval from the U.S. Department of Justice on grounds of antitrust issues, as part of the regulatory process under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. While the deal is expected to go through with minor modifications on regulatory grounds, if any, what we explore here is whether Alberto Culver’s acquisition makes sense for Unilever, and is the offer price reasonable?
Adds a Premium Price Point
Unilever is a market leader in mass skin care products and comes at a second position in daily hair care. Personal care accounts for 30% of Unilever’s revenues and 37% of its operating profit. Alberto Culver’s portfolio of brands such as TRESemme, VO5, Nexxus, St. Ives and Simple is not only expected to complement Unilever’s Dove, Suave and Sunsilk hair care brands and Pond’s and Vaseline skin care brands, but also extend Unilever’s products range to new premium price-points.
Also given the slow pace of economic recovery with still historically high unemployment levels in the U.S. and Western Europe, the growth in the personal care industry in these markets is expected to be under 4% going forward. It looks like Unilever is being opportunistic and taking advantage of the favorable interest rate environment to pursue inorganic growth through this deal making it the world’s leader in hair conditioning, the second largest in shampoo and the third largest in styling segment along with increased presence in U.S., Canada, Mexico and Australasia.
(Chart created by using Trefis' app)
Unilever’s Hair Care and Skin Care brands make up for over 29% of our $38 Trefis price estimate of Unilever’s stock. We currently estimate Unilever’s share of the global hair care market to grow from 9.6% in 2010 to 10.1% in 2012 eventually reaching 11.4% by the end of the forecast period. However, with Alberto Culver’s acquisition, we expect Unilever’s share of global hair care market to jump to 12% in 2011, which could help Unilever gain market share going forward.
We also estimate Unilever’s share of the global skin care market to grow from 26.2% in 2010 to 26.7% in 2012 eventually reaching 27.9% by the end of the forecast period. However, with Alberto Culver’s acquisition, we expect Unilever’s share of global skin care market to jump to 27.4% in 2011, eventually reaching 29% in a few years contributing to slight upside to our current Trefis price estimate of Unilever’s stock.
(Chart created by using Trefis' app)
How does the merger benefit Alberto Culver?
The price offered by Unilever at $37.50 per Alberto Culver’s share represents a healthy 33% premium to 12-month volume-weighted average price and an 18% premium to all-time high closing share price in 2010. So, we don’t see why shareholders would complain!
While Alberto Culver has a good presence in hair care and skin care segments in North America and Western Europe, Unilever also has a strong presence in the emerging markets in Asia, Latin America and Africa, which have been exhibiting markedly high growth rates in double digits compared to the mature markets in North America and Europe, which have been struggling with 3%-4% growth rates. Unilever’s established supply and distribution network in emerging markets presents an excellent opportunity to reach out Alberto Culver’s brands to a much wider consumer base.
But here’s our concern …
While the acquisition is expected to lead to immediate gain in Unilever’s market share, much of the value from the acquisition would be unlocked when synergies in operations and distribution are realized over the long-term. While, the integration of businesses might incur additional costs in the short term (2011-12), given the incoming premium high margin Alberto Culver products, we do not foresee a decline in EBITDA margins even in the short-term with in fact, a gradual increase with scale efficiencies in the long-term.
We currently estimate Unilever is worth around $107 billion. With the expected market share gains in hair care and skin care segments, we estimate 3% potential upside (at $110 billion) to our current Trefis price estimate of Unilever’s stock. However, Alberto Culver’s purchase price of $3.7 billion, still leaves the management to explore at least $700 million worth of cost efficiencies and improvements in operating margins for the acquisition to be EPS accretive for Unilever’s shareholder.
Disclosure: No position