Unilever (ULVR) is to acquire Seventh Generation, a North American household and personal care product manufacturer, for an undisclosed amount. With the target's sales likely to be around $250 million this year, we believe Unilever could have paid close to $1 billion.
For Unilever, we reiterate our wide moat and stable trend ratings, and £32.50 fair value estimate. The acquisition makes strategic sense for Unilever. Seventh Generation's household and personal care products contain fewer chemicals and use recycled packaging, which appeals to the environmentally conscious consumer.
Although it is still a fairly niche category at around 5% of the household detergent category, natural cleaning products are growing at a low-double-digit rate and offer one of the few premiumisation opportunities in a category that we believe will be susceptible to trading down in the long term. Store brand competition tends to be higher and pricing power weaker for products that are perceived to offer little consumption utility and are not consumed in social settings.
Natural cleaning products, therefore, may add significant value to the environmentally conscious consumer. This is evident in the sometimes hefty price premium achieved by natural household products at retail. We estimate that across the portfolio, Seventh Generation can sell at a premium of around 20% to competitive brands and a 60% premium to private label.
While we do not believe this acquisition alone moves the needle on Unilever's valuation, we think the additional exposure to premium price points should drive a greater contribution from price/mix in the company's household and personal care portfolio, 57% of 2015 sales.
Investment Thesis
Unilever's scale and scope give it competitive advantages, and with 58% of sales generated in emerging markets, the firm offers substantial exposure to growth markets. However, although we view the shift in emphasis to personal care from packaged food as a positive, we expect Unilever to have limited success in expanding its volume and margins simultaneously, given the highly competitive nature of its categories.
Management's stated objective is to achieve organic sales growth, driven by volume, at an above-market rate; we view this as an appropriate strategy that is likely to consolidate the firm's moat over time. As retail is a low-margin, volume-driven business, this should help cement Unilever's place as a primary merchant that is entrenched in its customers' supply chains globally.
