…and a few words.
There was, to put it mildly, an unusually high level of interest in Colgate Palmolive on Wednesday night.
Both in its shares:
And in its November and December call options:
Here, we think, is the reason.
From Reuters:
Speculation of a deal with Reckitt fueled an all-out feeding frenzy in Colgate call options, according to Interactive Brokers Group equity options analyst Caitlin Duffy.
About 63,000 Colgate call options changed hands, 21 times their recent average daily turnover and more than double the amount of its put options, according to option analytics firm Trade Alert.
…which seems to have emanated from the UK.
From the Daily Telegraph:
Talk of Reckitt doing a big deal
The latest tale is that Reckitt Benckiser is close to announcing multi-billion pound cross-border transaction. It is not clear which company Reckitt is targeting. SSL International, the maker of Scholl footwear products and Durex condoms, has always been tipped as a target for Reckitt.
However, well-placed sources think the most obvious candidate is US giant Colgate-Palmolive. The theory is that any deal between Reckitt and Colgate-Palmolive would have to be structured as a merger as they are roughly the same size.
Earlier this year, David Hayes and Alex Smith — the Nomura analysts who first raised the prospect of a Kraft bid for Cadbury — argued that Colgate-Palmolive could merge with a British company. However, they thought it more likely that Unilever would be the US company’s obvious merger partner.
As luck would have it Hayes and Smith have published a note on the mooted tie-up on Thursday morning.
They say there is scope for large cost and revenue synergies from a merger.
At this stage there is little to substantiate this speculation. Note the article in today’s Telegraph also suggests that Reckitt could be looking to acquire SSL.
Given our assessment that the Reckitt ‘virtual cycle’ model is under pressure due enforced heavy promotional activity in its core household activities, as well as the potential fall off of US Suboxone cash flows in 2010, we would not rule out Reckitt looking at some form of M&A. This could also include in our view Wyeth’s consumer healthcare business or Schering Plough’s consumer health care business.
Concerning Colgate, this is a potential combination that has been speculated on and off for a number of years. Given the broadly similar market caps we believe any potential combination would most likely be in the form of a nil premium merger.
With scope for both cost and revenue synergies arising through complimentary category and geographic overlap such a deal structured as a nil premium merger would be value creative for both sets of shareholders in our view. We value the best case NPV of Reckitt’s potential share of the synergies at GBP 3.7bn — the equivalent of 510p per Reckitt share or 16% of the current market cap.
But they question whether a deal makes sense from the Reckitt perspective.
However, relatively less demonstrable functionality in Colgate’s categories? We believe that part of Reckitt’s success over the last decade lies with its categories which tend to provide for more niche, value added consumer needs and where the functionality is easily demonstrated. Although Colgate has strong brands across its portfolio and oral care and pet care are two of the most attractive categories in consumer due to pricing power and resilience, Colgate’s categories generally do not share the same demonstrable functionality (body wash and soap) as Reckitt’s.
Although for Colgate it might be a necessity.
Pre-empt a potential move from Unilever. Although we think it unlikely that Unilever would look to undertake a large scale acquisition in the near term, it may well be that Reckitt and Colgate have a preference to bring together their more closely aligned and more nimble business models and cultures rather than risk being absorbed into Unilever at a later date. If speculation has foundations, we would see Unilever trying to step in for Colgate given similar synergy opportunity.Meanwhile, in early trading in London, the share price of Reckitt and its other mooted target, condom-maker SSL International, were both up.
And there could be further newsflow on this rumour later today when Colgate and Reckitt executives present at a Morgan Stanley Global Consumer & Retail conference.
Colgate-Palmolive (NYSE:CL) executives, Fabian Garcia, EVP, President, Colgate-Latin America & Global Sustainability and Franck Moison, President, Global Marketing, Supply Chain & Technology, will present on Thursday, November 19, 2009 at 7:30 a.m. ET at the Morgan Stanley Global Consumer & Retail Conference.
Investors may access a live webcast of this presentation on Colgate’s web site at http://www.colgate.com. For those unable to participate during the live webcast, a recorded version will be also made available on the ‘For Investors’ page.
Update:
Credit Suisse has chipped in with a few comments on the merger rumour. While it’s logical, analyst Charlie Mills says it can’t happen at the moment. That’s because there has recently been some insider selling at Colgate.
A potential link up between Reckitt and Colgate has been talked about in the press in the past given the similar cultures between the two companies, the potential for cost synergies and the strategic possibilities of selling Reckitt products through Colgate’s more developed Emerging Market infrastructure.
While we understand all this, we are not aware of any immediate catalyst for this merger to take place now, we also note that on 3rd Novermber, a Colgate insider was selling shares. Taken all together therefore we are sceptical on the imminence of a deal between these two at least.
Longer term the logic still stands – the two companies have similar market caps, similar net incomes and trade on similar P/E multiples. Therefore any ‘take-over’ of one or the other would likely result in a significant transfer of value between the companies respective shareholders. As a result we believe that if such a deal were to happen it would most likely be a merger of equals.
Related link:
Reckitt surprises with sales declines – FT
Colgate sees 2010 volume sales up 4-7 pct – Reuters