A few years ago, brokers across the City were starting to talk about the possibility of a mega merger between two FTSE 100 giants, Unilever (LSE: ULVR) (NYSE: UL.US) and Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGPF.US).
However, although the time was right for a deal, no offer ever came. But now the two companies are perfectly positioned for a merger, as the M&A boom continues to heat up.
Perfect fit
Even at first glance, Unilever and Reckitt appear to be an excellent fit. Both companies own and manufacture some of the world’s most recognisable cleaning products. For example, Reckitt produces brands such as Dettol, Finish, Cillit bang and Vanish, while Unilever’s portfolio includes Domestos, Cif and Dove.
What’s more, both Unilever and Reckitt manufacture many consumer products, such as Durex and Lynx. With so many brands, many of which are household names, bought together under one roof, the merger could generate impressive cost savings, as Reckitt and Unilever merged production facilities and distribution networks.
Merger catalysts
There are a number of recent catalysts that make me think a deal could be round the corner.
Firstly, Reckitt has finally concluded a strategic review of its pharmaceutical business, which it started back in October. The company’s pharmaceutical unit, which produces the heroin substitute Suboxone, has been denting Reckitt’s performance recently.
Indeed, Reckitt’s first quarter results revealed that the pharmaceutical division’s sales fell 11% during period, while the non-pharmaceutical divisions reported sales growth of 4%. Reckitt’s desire to sell, or offload this division, could re-ignite Unilever’s interest in the remaining group.
Meanwhile, Unilever itself is also busy reshaping its operations. In particular, the group is divesting non-core, low-margin food products and other consumer goods, in order to focus on cleaning products. Returns from food products have deteriorated during the past few years, due to rising costs and increasing competition. The sale of this non-core brands should bring Unilever’s product offering more into line with that of Reckitt.
Unilever’s recent non-core divestments include its meat snacks business, the Peperami brand, the Ragu and Bertolli pasta sauces brands and, during the past few days, the company has sold its US Slim Fast brand.
The bottom line
So all in all, Unilever and Reckitt would make a perfect fit and recent developments at both companies make me believe that a merger may be imminent.
Both Unilever and Reckitt have started a process of selling off non-core brands, which when completed, will leave the two companies with a concentrated portfolio of cleaning products.
A merger between the two would allow the combined group to cut manufacturing costs and reduce the prices of its products. The combined Unilever-Reckitt would be in a strong position to grab market share and drive sales, both within the UK and across developing markets.
