Mergers and acquisitions activity may be making a return, but it is to the domestic US market that most companies are turning their attention.
By George Pitcher
Oh, deep joy. Mergers and acquisitions activity is returning to the market – and we didn’t even have to wait for the spring.
Bliss it is in this dawn to be alive, but to be a merchant banker is very heaven. Or, for that matter, a merchant commentator who got it right last autumn – a category into which, for once, I happily fall.
Not only did this column flag forthcoming rationalisation in the local monopoly supply of electricity, but also (MW September 9 1994) suggested that Glaxo had better pull its finger out merger-wise and that the US is where the action is in fmcg brands for mature UK businesses (MW October 7 1994).
So now we have Trafalgar House’s unusual £1.2bn hostile bid for Northern Electric, followed on Monday by Glaxo’s £8.9bn offer for Wellcome and news on the same day that Cadbury Schweppes is to lay out £1.5bn for US soft drinks concern Dr Pepper. It’s enough to put the lead back in a teenage scribbler’s pencil.
I’ll not dwell on Trafalgar’s play for Northern. That’s about to turn dirty, with the outcome – not unlike Minorco’s ill-fated bid for Consolidated Goldfields in 1989 – to be decided by regulatory constraints rather than commercial fundamentals. But, in the cases of Glaxo and Cadbury Schweppes, there are matters of deep importance to brand marketers.
Glaxo’s move was slow in coming. A brief refresher of the pharmaceuticals market shows us that last year was a veritable square dance in the sector. The men in white coats linked arms to the music of patent expiry and international regulation, before diving into corners and coming out married.
SmithKline Beecham was the year’s Prince Charming, beating rivals Procter & Gamble and Bayer for the hand of Sterling Health – Kodak’s over-the-counter drugs business – for a handsome £2bn. It was actually a bigamous wedding, since SB had already won the hand of Diversified Pharmaceuticals for £800m.
American Home Products bought Cyanamid for £6.5bn, Merck spent £4bn on Medco, Eli Lilly bought PCS for £2.7bn, Roche acquired Syntex for £3.5bn and Gerber went to Sanboz for £2.5bn. All together now, take those pretty non-prescription drugs by the hand, strip out the overheads and follow the band.
The mighty Glaxo and Wellcome sat out 1994. Wellcome, it is said, flirted with Eli Lilly, but they were not really of the same class – the Glaxo match is the society wedding of the year. I should hardly need to say it, but an offer worth nearly £9bn is big, even by pharmaceutical standards.
I wrote last September that: “Glaxo will have to do something. Pharmaceuticals earnings have, to say the least, been flat. Rival SB has set a new pace with its bold acquisitions strategy. Impetuous acquisitions may damage a company’s health, but so too might undue caution.” Correct judgment, wrong implication. Glaxo was not dragging its heels, it seems, so much as picking its moment. It’s not in the bag, of course, but since the Wellcome Trust, which speaks for 40 per cent of the equity, is behind the bid, it’s as good as a done deal.
It remains to be seen what Europe’s largest drugs combine does with Britain’s fourth ranker. Glaxo has long been perceived as a one-hit wonder with its revolutionary anti-ulcer treatment Zantac. But it was the experience of Zantac – responsible for some 43 per cent of group turnover and more than half of post-tax profit in the early Nineties – that changed the culture of Glaxo. It has become a prescription medicine specialist, but it needs more of them. Hence Wellcome.
Wellcome has the anti-herpes drug Zovirax, the AIDS treatment Retrovir and such mass-market brands as Listerine and Benylin within its portfolio, not to mention the company’s worldwide otc partnership with Warner-Lambert. Be afraid SB, Bayer and Eli Lilly.
Turning to Cadbury Sch-weppes’ offer for Dr Pepper, there are definite resonances of Reckitt & Colman’s near-£1bn purchase of L&F Household from Eastman Kodak last year. In that instance, Reckitt came up with the necessary by indicating that its Colman’s Mustard brand was up for sale.
I am reliably assured that Crunchie, Flake or Bourneville are not up for sale to fund the £1.1bn Dr Pepper takeover, but there are similarities between the Cadbury and Reckitt strategies, and they are about size. Or, rather, they are about be-ing the right size in the right place.
Cadbury’s acquisition of Dr Pepper should not actually surprise anyone. It already owns 25 per cent of the proprietor of 7-UP, so the bid can hardly be termed as being any more hostile than Glaxo’s for Wellcome, where the Trust has put its 40 per cent welcome on the mat. What it is about – like Reckitt’s move on L&F – is developing US market share. The Dr Pepper purchase will take Cadbury’s share of all US soft drinks from five per cent to some 16 per cent, and that of the American non-cola market from 17 per cent to an almost anti-trust (were it not for the massive cola market) 42 per cent.
The Dr Pepper acquisition is not about strictly financial considerations – as could be argued with Reckitt’s purchase of L&F. There’s a reasonably hefty lump of debt in Dr Pepper and no dividend stream. Cadbury will also have no access to the marketing of 7-UP outside the US. The rights to that are jealously owned by PepsiCo.
It remains the case that the likes of Reckitt – with L&F’s Love My Carpet and Mop & Glo – and Cadbury see the brand action for growth in the domestic US market rather than Europe. At the moment, I have to say that I haven’t a clue whether they are right, but these sums of money are not parted with on a whim. Nor are the likes of Colman’s Mustard.
All I will say is that the implications for UK and European branding are somewhat depressing. If I were looking for a job in fmcg brand management, I would be heading west, at least for what’s left of the millenium.
But to return to a cheerier note, at least a re-invigoration of the M&A market has come sooner rather than later in the UK this year. Now all we need are some corporate finance departments that remember how to conduct a decently sized deal.
George Pitcher is joint managing director of media consultancy Luther Pendragon.