The speed of change in fmcg is forcing companies to revisit their portfolios and really try to ascertain where they will still have competitive advantages in the new world.
Unilever, Reckitt and Nestlé are all going through seismic portfolio changes. Unilever has merged refreshment (ice cream and tea) with its foods unit. The new business will have a powerhouse global foods portfolio and €20bn of sales even after its (now confirmed) €7bn spreads disposal to KKR. Reckitt is also changing, splitting into two business units - consumer health (equivalent to Unilever’s personal care) and home/hygiene (equivalent to Unilever’s home care), each with full P&L responsibility. This makes separating these businesses easier and arguably increases the likelihood of further M&A activity.
We think Unilever could be interested in Reckitt’s new home/hygiene division. Since 2015, Unilever has spent €10bn on 20 acquisitions, mostly small bolt-ons focused on HPC. Its real skillset is scaling up proven models, rather than coming up with new ideas from scratch. This strategy is likely to be growth accretive, but the problem is that it doesn’t move the needle quickly. Unilever’s home care division is under-rated, despite having grown 5% in the past four years while doubling margins. Acquiring Reckitt’s home/hygiene division would add Vanish to Unilever’s laundry portfolio, and offer sizeable white space opportunities in emerging markets, and bring other scalable brands like AirWick, Harpic and Finish. It could cost £17bn, but would be double-digit accretive to Unilever’s earnings.
Reckitt has made no secret that it would like to acquire Pfizer’s consumer health division, which would add brands like Centrum vitamins and analgesic brand Advil, but RB faces operational challenges and is highly leveraged after its £13bn Mead Johnson acquisition last year. This means it may like to sell first, before it buys anything.
However, with Nestlé looking increasingly interested in vitamins, Reckitt may not have time to delay and may need to consider issuing equity. Nestlé has sold its US confectionery unit to Ferrero for CHF2.8bn and new CEO Mark Schneider seemingly has a mandate to build its consumer health division. After a $2.3bn investment in US natural vitamin business Atrium in December, Nestlé is reportedly one of the lead bidders for Merck KG’s consumer health portfolio (brands like Seven Seas), which combined would represent a quick-fire $7bn bet on the vitamins segment. It may also increase the probability that Nestlé sets its sights even higher and looks at Pfizer’s consumer health division, with the main attraction being Centrum - the only truly global vitamin brand.
But the big question is how attractive the vitamins category really is. Consumer benefits are not immediate and repeat purchase cycles are less attractive than other fmcg categories. Reckitt’s former CEO Bart Becht was not a fan. Current CEO Rakesh Kapoor acquired vitamin business Schiff in 2012, but then had to admit growth did not live up to expectations. Overall, 2018 is set to be another year of dramatic portfolio change.
Warren Ackerman is head, global staples research, at Société Générale
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