Billion-Buck Brands on the Block

Taking Heat From Street, Kraft, P&G Likely to Divest Leaders in Slow Categories

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BATAVIA, Ohio ( -- Let the sell-off begin.

Unilever's $1.1 billion North American laundry business is the first of many big U.S. brands expected to hit the market in the months and years ahead as multinational marketers increasingly realize it doesn't pay to fight for share in slower-growing U.S. categories.
No. 2, but far from safe.
No. 2, but far from safe.

Unlike in the past two decades, when marketers were ditching smaller brands, some giants are now looking vulnerable. Analysts and others familiar with the company expect Procter & Gamble Co. to divest Duracell batteries (possibly through an initial public offering) and seek buyers for two more billion-dollar brands -- Folgers and Pringles -- following an internal review in September. And Kraft Foods CEO Irene Rosenfeld, under pressure from activist investors such as Nelson Peltz and Carl Icahn, is taking a hard look at the food giant's portfolio, with published speculation focusing on such big brands as Maxwell House coffee and Post cereals.

Better days
All are big, profitable brands that only five to 10 years ago would have been considered unlikely candidates for divestiture. In a marketplace where being No. 1 or No. 2 once was coveted, the list includes the No. 2 U.S. marketer of detergents, the No. 1 alkaline-battery brand, the No. 2 national brand of potato snacks and the top two packaged-coffee brands.

A perfect storm of global market factors and investor sentiment could push multinational marketers aside in these categories in favor of more locally focused players, orphan-brand roll-ups or private-equity investors.

The reason: Investors clearly are pushing harder for top-line growth from big marketers than they have in the past, analysts said. So even brands such as Folgers, Maxwell House and Pringles, which are highly profitable cash generators, suddenly become drags on the portfolio because their categories are growing slowly or not at all, as they have for years.

Unmet expectations
Even without obvious pressure from activist investors, and while hitting or exceeding all its financial targets, P&G's stock has lagged behind the market and some peers in the past two years as its organic sales growth rate slipped to 5%-6% in recent quarters from around 8% in 2003 and 2004.

It hasn't helped that competitors big (L'Oreal, Reckitt Benckiser and Colgate-Palmolive Co.) and small (Energizer and Revlon) handily beat that pace last quarter, while Unilever, long a slower-growing rival, matched it.

Deutsche Bank analyst William Schmitz said P&G may make the divestitures "to signal [to investors] that it's willing to make changes," a sentiment that clearly figured in Unilever CEO Patrick Cescau's decision to put the laundry business up for sale, and could figure into any eventual Kraft divestitures.

P&G, Unilever and Kraft all have been sticking with or looking to expand businesses or brands outside the U.S. even as they've divested or considered divesting the same businesses and brands in the U.S.

Laundry faithful
Unilever is sticking with the laundry business even in slower-growing Western Europe, as well as in developing markets where it's a market leader. Similarly, P&G last year sold Pert shampoo while keeping its cousin Rejoice in Asia. And it kept Vidal Sassoon on shelves in Asia after shutting it down in the U.S. in 2003.

Why? Emerging markets offer faster growth -- north of 10% in personal care and some food categories -- compared with flat to 1%-2% growth in the U.S. in such categories as coffee, alkaline batteries and laundry detergent. It's been six years since the last major developing-market financial crisis, making it easy to forget one could happen.

Kraft also has been in talks to buy Groupe Danone's biscuit business in Western Europe -- neither a fast-growing category or geography -- and that highlights another factor encouraging divestitures: Marketers need to diversify away from the U.S., particularly as the dollar has been declining against major currencies for years.

That's made it harder for European and Japanese companies to squeeze profits out of the U.S., and easier for U.S. companies to make money overseas. Investors may focus on organic sales that strip out currency effects, but they also still want raw earnings growth, where currency figures heavily.

Good time to sell
Also factoring into the equation is that now is a great time to sell U.S. brands. Slow growth or no, margins on many of the businesses up for sale or rumored to be headed there are stronger than they've been in years following recent price increases, said Burt Flickinger, principal of the consulting firm Strategic Resource Group.

It's not clear, however, that competition or the U.S. consumer, battered by the credit crunch, gas prices and declining housing values, will allow another round of price hikes, which have been relatively scarce this year.

Sale prices for package-goods businesses and brands have been running at historic highs, Mr. Schmitz said. Even though the growing credit crunch has hit private-equity investors of late, he still believes many of the brands on the market have enough interest from strategic investors to fetch good prices or find well-heeled private buyers.

A relatively strong market may be one factor behind Campbell Soup Co.'s decision last week to try to sell its $500 million Godiva Chocolatier business after living for years with the odd pairing of a luxury retail brand within Campbell's stable of mass-market wholesale brands. Advising Campbell on the deal is Centerview Partners, a firm whose partners include former Nabisco and Gillette CEO Jim Kilts, who sold both those companies.

Of course, the same factors that make it a good time for marketers to sell big, slow-growing U.S. brands also make it a bad time for some to buy them. "The question," said Mr. Flickinger, "is why any financial buyers would want to buy them now."
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