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Finanzas: Colgate: Potential Buyout?

Finanzas: Colgate: Potential Buyout?
Mayo 18, 2017

Autor/Fuente: seekingalpha 👤Periodista: María Luisa Ayala 🕔18.May 2017

 

Summary

  • Colgate’s CEO says he would sell at $100.
  • Two of the company’s competitors are big enough to make a bid.
  • Both are not likely to do so.
  • There isn’t a lot of value in buying Colgate at $100, even if there are a lot of synergies and costs can be cut.

On Wednesday we got news about Colgate-Palmolive’s (NYSE:CL) CEO’s statement that he was open to selling the company at a price of $100 per share. Who could make such a bid, and is it likely to happen?

Colgate trades at $72 right now, which is close to the upper end of its 52 week trading channel between $64 and $74. A takeover price of $100 would be a premium of 40% over the current price per share.

Colgate’s business consists of a couple of segments: Oral hygiene, personal hygiene, cleaning agents and pet food. The first two make up the majority of revenues and thus are the company’s most important product lines (toothpaste, toothbrushes, soap, antitranspirants, etc.). Colgate’s main competitors include Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Reckitt Benckiser (OTCPK:RBGLY), as well as Clorox (NYSE:CLX) and Henkel (OTCPK:HENKY).

Procter & Gamble as well as Unilever have market capitalizations that are a lot bigger than the size of the deal ($89 billion takeover price at $100 per share), the other three have market capitalizations that are smaller than Colgate’s, thus will not be able to go for such a deal.

Sugerimos: http://www.america-retail.com/finanzas/finanzas-utilidades-de-saci-falabella-crecieron-118-en-el-primer-trimestre/

It is possible that someone else makes a bid without being a competitor, such as 3G Capital, which has some cash that it seeks to employ (after the proposed takeover of Unilever by Kraft Heinz (NASDAQ:KHC) has not worked out), but I believe that is not very likely.

Colgate’s business can be described as stable, but one could also say that Colgate’s business has been stagnating — net income as well as cash flows have not improved materially over the last five years.

With a proposed takeover price of $88 billion, an acquirer would have to pay 34 times free cash flow and 35 times net earnings, which is equal to a free cash flow yield / net income yield of 2.9%.

There likely would be some synergies between Colgate and Procter & Gamble (if they were to make a bid), so let’s assume $1 billion in operating expenses can be cut without hurting revenues — this would mean that after tax earnings (as well as free cash flows) would increase by $700 million (using Colgate’s tax rate of 30%), which would bring the annual free cash flow number to $3.3 billion, for an price to FCF multiple of 27, or a free cash flow yield of 3.8%.

With annual free cash flow of $12.1 billion in 2016, Procter & Gamble’s shares are trading with a free cash flow yield of 5.4% — a much better value than Colgate’s shares (even when we include synergies of $1 billion annually after a takeout). Unlike Colgate’s cash flows, Procter & Gamble’s cash flows have been growing over the last years, increasing by $3 billion in five years — this is another factor that makes it look like Procter & Gamble is the better investment.

Should Procter & Gamble buy shares of Colgate to get a 3.8% free cash flow yield (if they can cut a lot of costs), or shouldn’t they rather buy their own shares for a 5.4% yield without any regulatory risk? The second option sounds more sensible, thus I believe a takeover by P&G is very unlikely.

Unilever’s free cash flows are not that high, and shares are not trading at a free cash flow yield as high as Procter & Gamble’s. This means that buying back their own shares is not more attractive than buying Colgate’s, but it also means that Unilever doesn’t have the cash flows that would be needed for a cash deal. Unilever thus could only take over Colgate with a takeover paid for via equity, i.e. by issuing new shares.

Since Colgate trades at a higher valuation than Unilever, even before a takeover premium of 40%, such a deal would be very dilutive and would lower the earnings yield for Unilever’s shares — I don’t think Unilever’s management will be keen to make such a move that is not beneficial to their shareholders at all.

Takeaway

Two of Colgate’s competitors would be big enough to make a bid for Colgate, but both are rather unlikely to do so: P&G should invest its cash flows to repurchase their shares, as they are a much better value, and Unilever would have to dilute existing shareholders massively for such a takeover.

The $100 per share Colgate’s CEO seeks as a takeover price are unlikely to get paid by anyone, as this is a 40% premium for a company that is already expensive and that has a very hard time growing at all.

Colgate has its merits as a stable dividend payer that is active in a business that will be profitable even in bad times, and the yield is better than what investors get in the broad market, but capital appreciation and hopes of a takeover are not why investors should buy this stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

 

Fuente: seekingalpha

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