Why P&G Buying Unilever is Unlikely

+0.62%
Upside
162
Market
163
Trefis
PG: Procter & Gamble logo
PG
Procter & Gamble

Just the idea of the two leading consumer goods giants, Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL), considering a merging would have seen preposterous a while ago, but news sources are abuzz over this prospect in recent days. [1] Our price estimate for P&G is over $68 and Unilever is over $35.

Notwithstanding the absence of any official communication from either companies on the subject and the lack of veracity of what could very well be ‘wild rumors’, as also acknowledged by the British publication Daily Mail, we here go on to explore what makes such an acquisition unlikely.

 

Relevant Articles
  1. Should You Pick Procter & Gamble Stock At $155 After A Mixed Q2?
  2. Is Procter & Gamble Stock Fully Valued At $150?
  3. Will Procter & Gamble Stock Continue To Rise After 27% Gains In The Ongoing Inflation Shock?
  4. Should You Buy TMUS Over Procter & Gamble Stock For Better Returns?
  5. Should You Buy Colgate-Palmolive Stock At $80?
  6. Here’s A Better Pick Over Procter & Gamble Stock

Regulatory constraints on anti-trust grounds

P&G and Unilever are both leading players in the personal and household care products segment and are among the top three players in laundry detergents, surface cleaners, shampoos, deodorants and oral care products.

A combined entity would result in market leadership making up over one-third of the total market in many of these products segments. In an attempt to grow and even retain market share in the past, both players have resorted to competitive pricing which benefits consumers. A combined entity would not only enjoy sourcing and distribution synergies, and hence cost savings, but also be less likely to pass on benefits of scale to the consumer in the form of price cuts. Hence, a merger of overlapping personal and household care businesses is less likely to get regulatory approval, simply on grounds of it suppressing competition in the market.

Unilever has already had to face similar issues with its recent acquisitions. Unilever sold its Sanex brand of bath and shower gels to Colgate-Palmolive (NYSE:CL) for regulatory approval of its acquisition of Sara Lee’s personal care and European laundry care business. See Unilever Sells Sanex to Colgate to Shed Weight Post Sara Lee Deal.

P&G walking away from foods business

Unilever’s food brands include dressings, spreads, ice creams, and beverages making up over 55% of our price estimate. While P&G acquiring Unilever’s foods’ businesses is not expected to face regulatory constraints on anti-trust grounds, P&G has taken its focus off foods after recently after offloading Pringles to Diamonds Foods in a $1.5 billion stock transaction. See P&G Walks Away From Foods, Sells Pringles For $2.35 Billion. Prior to this, P&G has gradually divested from foods selling Jif and Crisco in 2002, Sunny Delight in 2004 and Folgers coffee in 2008 in order to focus exclusively on the high-growth and higher-margin personal care brands.

In a scenario where P&G acquired Unilever and wanted to break up Unilever’s food brands, Nestle could be one large company with the size to absorb a sizable piece of Unilever. Nestle, the world’s biggest foods group, has a 30% stake in L’Oreal (PINK:LRLCY) amounting to over $20 billion at L’Oreal’s current market capitalization of $73 billion. However regulators could take issue with the level of market share apart from Nestle’s contract with L’Oreal that bars it from liquidating its stake in L’Oreal before 2014. [2]

Given the overlap in the personal care and beauty business in addition to P&G’s moves to reduces its exposure to foods brands, makes us think that a mega acquisition is unlikely.

View our detailed analysis for Procter & Gamble and Unilever here.

Notes:
  1. P&G likely to make GBP 38 billion bid for Unilever, Economic Times, June 2, 2011 []
  2. Nestle to decide on L’Oreal stake in 2014, fashionmag.com, April 14’ 2011 []