Has Colgate-Palmolive Joined the Divestment Bandwagon?

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Oral care behemoth Colgate-Palmolive (NYSE:CL) has joined the growing list of consumer processed goods (CPG) companies that have sold or split off brands and business segments in recent months. It has entered into an agreement to sell its laundry brands in Australia and New Zealand to German CPG giant Henkel for $245 million. The brands to be sold had combined revenues of $123 million in fiscal 2014. [1]

The transaction marks Colgate-Palmolive’s exit from the laundry detergents and pre-wash brands from the two countries. On the other hand, the deal will put detergent brands like Cold Power, Dynamo and Fab detergents in Henkel’s control, making it one of the biggest players in the Australian market.

We have a price estimate of $60 for Colgate-Palmolive, which is about 10% lower than its current market price.

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See our complete analysis for Colgate-Palmolive here

One-Off Move or Indicative of a Broader Strategy?

Colgate-Palmolive’s reasons behind the sale are not immediately evident as the company has not released a statement regarding the sale. The divested brands account for just 1% of Colgate-Palmolive’s revenues from its Fabric Care division, making the transaction too inconsequential to be indicative of a broad strategy. However, it is possible that Colgate-Palmolive may have decided to join Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL) in deciding to divest underperforming brands or businesses.

Procter & Gamble is currently implementing its biggest strategic move in recent years, by divesting nearly a hundred under-performing brands regardless of their size and market. Similarly, Unilever has been slowly divesting its Foods brands since as far back as 2008 and is now turning its attention to premium personal care products. While there are certainly some differences between the strategies of these two companies, we believe that each company is following different means to the same end (Read: Are P&G And Unilever Headed In Opposite Directions?). This end goal is to get rid of brands or businesses that have failed to gain traction and focus solely on the best performing segments which have the most potential.

Colgate-Palmolive’s Home Care division certainly fits the criteria of an underperforming business, as it has been outshined by the company’s other divisions in recent years. Revenues from the home care division, which includes household care and fabric care products, have declined each year since 2012. The decline in home care revenues has been accompanied by a persistent loss of market share as well. According to our estimates, Colgate-Palmolive’s market share in the global home care market has declined from 4% in 2008 to a little over 3% in 2014. The EBITDA margin of the home care division has not fared any better, and has declined from a peak of 29.5% in 2009 to 27.9% in 2014.

Therefore, given that Colgate-Palmolive has failed to turn around the fortunes of its home care business over the last three years, it is conceivable that the company may have decided to pare its losses by choosing the divestment route. Nevertheless, it remains to be seen whether the sale of the Australian laundry brands was a standalone move, or the first of many more to come.

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Notes:
  1. Henkel to buy Colgate-Palmolive’s Australia, NZ laundry brands for 220 mln euros, Reuters, May 12, 2015 []