Consumer-Packaged-Goods Players Fighting Urge to Consolidate

Merging Makes Sense, but Tougher Regulatory Scrutiny in U.S., Europe Makes Deals Unattractive

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With industry growth slowing and margins under pressure from stepped-up marketing and material costs, pressure on packaged-goods players to merge has grown. Yet tougher regulatory scrutiny could put the brakes on the urge to merge as deals become harder to close and terms of government approvals both in Europe and the U.S. grow more unpredictable. There's also been a shift in how mergers are evaluated in the U.S. that places less emphasis on share concentration and more on the underlying market dynamics.

Regulatory scrutiny is among the factors making a big acquisition by Procter & Gamble Co. appear less likely than some analysts expected a year ago, when company executives said they were open to acquisitions after a period of several divestitures. But speaking in February at the Consumer Analyst Group of New York meeting, P&G Chief Financial Officer Jon Moeller listed the regulatory environment among factors weighing against a big deal.

Jon Moeller
Jon Moeller

"We have to get regulatory approval," he said, "which is increasingly more difficult both as the size of our company grows and as regulatory regimes around the world are getting more difficult."

P&G rival Unilever has discovered that too, particularly in Europe. Per European Union directive, Unilever in March agreed to sell Colgate-Palmolive Co. its Sanex deodorant business there, the biggest piece of its 2009 acquisition of Sara Lee's global personal-care business.

Unilever in March also said it would divest the small bar-soap business owned by Alberto-Culver to clear the way for U.K. approval of its $3.7 billion acquisition of that company. But the deal still awaits U.S. approval, too, after a second request for information from the Justice Department last year.

When Unilever announced the pact in September, the company projected it would close by December, but it hasn't gotten regulatory approval in the U.S. yet. A spokesman declined to comment on the issue.

"It's a Catch-22," said Sanford C. Bernstein analyst Ali Dibadj. "The bigger companies need more growth, but they're more limited in what they can buy to get that growth because of their size."

Tougher regulatory scrutiny raises the risk companies will do deals to enter markets where they don't have much expertise, he said.

Europe, which also has wide-ranging probes of CPG players over alleged anti-competitive activities dating to last decade, has been particularly hard on deals of late, surprising analysts with the demand Unilever divest Sanex.

But new guidelines issued in August by the Federal Trade Commission and Justice Department for evaluating mergers also make the approval process less predictable, said Stephen Mahinka, an antitrust lawyer with Morgan Lewis in Washington.

He said he couldn't comment specifically on Unilever, a client of the firm. But market-share concentration in general is now far less crucial in determining whether U.S. regulators oppose deals, Mr. Mahinka said. That's a substantial departure, he said, "from the set way mergers have been reviewed with relatively minor revisions since 1982."

Per EU directive, hair-brand king Unilever sold Sanex deodorant to Colgate in Europe.
Per EU directive, hair-brand king Unilever sold Sanex deodorant to Colgate in Europe.

More important now are projected competitive effects on pricing, he said, including how individual brands and their positioning figure in a category.

That change in regulators' thinking could have a bearing on Unilever's acquisition of Alberto-Culver, according to people familiar with the matter.

Combined, the two only have about a 24% share of the U.S. shampoo market, compared with 36% for P&G, according to SymphonyIRI data from Deutsche Bank. P&G's leading share comes in part from its 2001 acquisition of Clairol shampoo brands, approved by the Justice Department without any demand for divestitures, so Unilever's acquisition of Alberto-Culver seemed unlikely to provoke much scrutiny.

But Unilever and Alberto's combined share, while smaller, includes by far the biggest brands in the value-priced tiers of hair care -- Suave and Tresemme -- which some believe could lessen promotion and price competition at the lower end of the market. Alberto also owns a smaller value brand, namesake Alberto VO5.

A new U.S. regulatory focus on marketing dynamics over market share in approving mergers could also affect other categories, such as AT&T's proposed acquisition of T-Mobile.

Still, deals have been getting done among smaller players. Coty, uninhibited by regulators, snatched up a series of beauty businesses in the U.S. and Europe last year, including skin-care brand Philosophy and nail-polish brand OPI. But Coty also remains far from a dominant player in those highly fragmented categories.

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