Why Unilever's Laundry Business Is No Easy Sell

Henkel, Others May Not Want to Pay Big to Boost Presence in Tepid Market

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Retreating from North American laundry could prove trickier than Unilever imagined, as leading candidates to buy its $1.1 billion business face issues that could make a deal unappealing.
Unilever isn't ready to wash its hands of the laundry business yet.
Unilever isn't ready to wash its hands of the laundry business yet.

Unilever's investment bank, Morgan Stanley, originally was expected to distribute black books on the business right after Labor Day, but as of last week still had not, said people familiar with the matter, one of whom believes Unilever may be waiting for market conditions to improve.

Souring outlook on the slow-growing laundry market and the tightening of credit markets make a deal less likely, though it remains very much a possibility.

A Unilever spokeswoman declined to comment, other than to say that the company has said all along it might keep the business or seek other arrangements such as joint ventures. Unilever announced its intention to seek buyers or other options in early August.

Suitors
Three or four strategic buyers are believed by several people familiar with the industry to be the most likely buyers, including Henkel, Church & Dwight Co., Vestar (majority owner of leading U.S. private-label detergent maker Huish) and Phoenix Brands, an orphan-brand consolidator that previously bought Colgate-Palmolive Co.'s former laundry brands. Spokespeople for the four potential buyers didn't return calls for comment.

The two biggest players could be put off by some of the same factors that make Unilever want out of North American laundry -- its relatively slow growth and overwhelming scale and marketing-spending advantages enjoyed by industry behemoth Procter & Gamble Co.

"It's Henkel's to lose," said one person familiar with the industry, adding however, that Henkel may want to do just that. The German package-goods giant has both the financial wherewithal and the global laundry scale to make such a deal a good fit. But the company's priority in recent years has been building its global personal-care business through acquisition. From that point of view, adding a big detergent business would be a step in the wrong direction.

The same issue could be an even bigger hindrance for Church & Dwight, whose focus has been on expanding into literally sexier personal-care businesses such as Trojan condoms or First Response home-pregnancy and ovulation-testing kits. With only $2.1 billion in sales, adding Unilever's $1.1 billion laundry business would make Church & Dwight overwhelmingly a laundry-detergent business, yet still overshadowed by bigger and more diversified P&G.

Least likely buyer
That, and the fact that Church & Dwight substantially underbid Henkel in a 2006 deal to acquire former Gillette deodorant brands from P&G, according to a person familiar with the transaction, makes Church & Dwight appear to be the least likely buyer.

That leaves Huish and Phoenix, both backed by private investors (led by Vestar for Huish, Lehman Brothers for Phoenix), both of which would likely would find the deal more strategically attractive. But either would need substantial debt to do it and the credit-market tightening could make that much harder. The deal would roughly double Huish (with sales of $1 billion) and possibly triple Phoenix.

All those factors could result in Unilever keeping the business, at least for the short term. And that could be good news for P&G. The other buyers, particularly Henkel, could realize significant efficiencies and get more aggressive in marketing or pricing, giving P&G a harder time than Unilever has.

'Milk the brands'
Should Unilever stay in laundry after signaling its desire to sell, people familiar with the company believe it would most likely "milk the brands," as one put it, harvesting as much cash and investing as little back in as possible.

Bartle Bogle Hegarty, New York, handles All and Interpublic Group of Cos.' Lowe, New York, handles Snuggle, but the brands might well go without agencies of record should Unilever seek purely to harvest cash.

Then again, if Unilever is truly desperate to end its exposure to what's been mostly a share loser (though shares have recently stabilized some), it could offer more favorable terms or essentially finance the deal itself, said one person familiar with the company. Unilever used essentially seller financing to let go of Elizabeth Arden cosmetics and its U.S. industrial-cleaning business in the 1990s.

Laundry list

Potential buyers of Unilever's brands

HENKEL
WHY BUY: It'd become the clear No. 2 in North American laundry, develop needed scale in the U.S. and engage global rival P&G much more effectively on its home turf.
WHY NOT: Henkel wants to get bigger in higher-margin, faster-growing personal care, not laundry.

CHURCH & DWIGHT
WHY BUY: It'd also become the clear No. 2 in North American laundry and realize significant scale efficiencies for its current laundry business.
WHY NOT: The deal would make Church & Dwight primarily a laundry marketer when it wants to be more a personal- and health-care marketer. And it still would be dwarfed by P&G.

VESTAR/HUISH
WHY BUY: It too would become the clear No. 2 in North American laundry and develop a major branded business to complement its private-label products. Already a highly efficient producer, it'd have scale to market more effectively and reap higher margins.
WHY NOT: Majority owner Vestar is a private-equity player, and capital markets have soured on highly leveraged deals.

PHOENIX BRANDS
WHY BUY: Yup, it'd become the clear No. 2 in North American laundry, adding Unilever's discarded brands to those of Colgate-Palmolive Co. It could develop substantial scale efficiencies, and CEO Mark Landry, a former Unilever finance executive, knows the business well.
WHY NOT: Same as Vestar: It's a private-equity play in a capital market that's soured on risk. And Mr. Landry knows the business well enough to know how hard it can be to compete with P&G.
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