Byline: Andrea M. Grossman / with contributions from Melissa Drier, Berlin

NEW YORK — Who will be Clairol’s new parent?
Since Bristol-Myers Squibb announced its intent to sell the $1.89-billion beauty subsidiary in September to focus on its core pharmaceutical business, one of the most talked about topics at beauty events and conferences has centered around who will — or will not — buy America’s leading hair care company.
While analysts may not have concrete answers, they do have theories about the most likely suitors (such as Procter & Gamble, Unilever and Henkel) and possible secondary suitors (such as Wella, Johnson & Johnson and Shiseido). They also have unanimously determined who will not buy Clairol, namely L’Oreal, since a purchase of Clairol would clearly raise antitrust issues. And perhaps the most discussed issue is who would or would not be able to afford Clairol’s $4 billion to $5 billion price tag.
According to analysts, Procter & Gamble is among the top candidates to buy Clairol, for many reasons. For starters, it is one of two companies — Henkel is the other — that openly said it was taking a look at the Clairol business. P&G noted this detail in an 8K filed with the Securities Exchange Commission on Nov. 20.
Analysts also noted that a Clairol acquisition would place P&G on the hair color map and into the number-one hair color position in one deal. P&G, analysts explained, already has an established distribution base, both domestic and international, and a firm commitment to the personal care category. Several points, however, lead some analysts to doubt whether P&G is poised for such a large acquisition.
Carol Warner Wilke, household products and cosmetics analyst at Credit Suisse First Boston, is not particularly bullish on the acquisition for several reasons. Procter & Gamble, she believes, has several challenges in its current business, including that it is currently making its earnings on gains from asset sales. Such a huge acquisition at this point may take away management focus on this issue.
“We have seen several examples in this industry where large acquisitions don’t reach goals and management gets distracted with the integration and big shortfalls result,” Wilke wrote in a report after P&G announced it was looking at Clairol. Wilke cited large acquisitions that have taken a toll on management focus, such as the Clorox-First Brands and Newell- Rubbermaid deals.
Wilke, however, sees an option that could make acquiring Clairol more profitable for P&G.
“If they did an asset swap I would be more positive because they would be swapping an unprofitable business for a profitable business,” Wilke said in an interview, in response to P&G’s 8K filing that also stated it presently wasn’t considering an asset swap.
Bill Steele, a consumer products analyst with Banc of America Securities, noted that while P&G is one his top picks as a new parent for Clairol, what P&G would ultimately do with Clairol is unknown.
“Clearly you do not try to negotiate these things in the press,” Steele said, “but one could argue that pharmaceutical is not P&G’s core business; it is committed to personal care. But they are clearly in a transitional period, so we have to ask whether we want them to take the time to assimilate a $4 billion to $5 billion acquisition. I would be hesitant.”
Steele also noted that interested Clairol suitors would be gaining a company that is experiencing declining sales and earnings results. For 2000, Clairol’s sales decreased 6 percent to $1.89 billion with domestic sales decreasing 4 percent and international sales down 9 percent, excluding an 8 percent foreign exchange. As of Sept. 30, Clairol’s volume was down 12 percent with hair care sales down 5 percent and hair coloring sales down 3 percent. In 1999, Clairol’s earnings before taxes were $247 million, down 28 percent from $343 million in 1998. However, Clairol’s 2001 pipeline includes two new shampoo line launches and a hair color launch under the Herbal Essences brand.
Among Steele’s other top suitors for Clairol are Unilever and Henkel.
Unilever, despite its solid Helene Curtis hair care subsidiary, does not have any hair color business, which would make acquiring Clairol ideal. London-based Unilever also has strong international ties. Steele, however, pointed out that Unilever’s recent acquisition binge could be a speed bump for acquiring Clairol.
“They recently closed the deal on Best Foods, and before that they bought Slim Fast, and before that they bought Ben & Jerry’s. You could see how [Clairol] would fit in with their global structure, but right now I don’t know how well their infrastructure would handle another large acquisition.”
Johnson & Johnson is another “interesting name” Steele recently heard in the mix of potential buyers for Clairol, and according to one industry source, “J&J has made a firm, competitive bid for Clairol.”
Steele explained why J&J is a possible contender. “They are more of a pharmaceutical company, but they have strong consumer brands like Johnson & Johnson baby shampoo, Roc and Neutrogena.”
Also, the possibility of a pharmaceutical swap makes J&J a likely candidate, as Bristol-Myers Squibb is selling Clairol so it can focus on its $20 billion drug business. Salon hair care giant Wella has been mentioned as a top suitor, too. But Michael Winkler, an equity research consumer goods analyst with WestLB Research of Frankfurt, Germany, noted that Wella is focusing on an entirely different segment of beauty.
“I think it is relatively unlikely that Wella will purchase such a company, because this would not be their dedicated area of growth. Wella’s perfume and cosmetics business wants to go public with an IPO in one to two years, so I would rather suspect that Wella wants to grow via acquisitions in this part of the industry.”
Henkel, a Dusseldorf, Germany-based company, could also be an active partner in the bidding process for Clairol, according to Christian Faitz, an analyst at BNP-Paribas in Frankfurt. “Ulrich Lehner [Henkel’s chairman] said it has an interest if the price is right,” Faitz said. Clairol would be a good fit, Faitz explained, “because Henkel wants to expand in the U.S. Their efforts there until now have been dismal.”
Henkel, a leading European personal care company with sales of $1.7 billion, has made small inroads in the U.S. beauty market. It purchased the Dep Corp. in 1998 under which it launched a soap brand called Fa, which failed at retail.
“Henkel wants to grow in hair colorants, and that’s exactly Clairol’s strength. And they want to expand in brand names in the U.S., so it could be a perfect fit,” Faitz said. Almost half of Henkel’s sales comes from Schwarzkopf, a professional and retail hair care brand it acquired in 1995.
Ultimately, the possible suitors of Clairol will meet more criticism from Wall Street than it will from a suitor’s management team.
“There is always a difference of issues,” Steele said. “Management takes a long-term view of an acquisition whereas Wall Street takes a short-term view.”
One theory is unanimous among analysts, however: Large acquisitions have not always been the best use of shareholder funds.

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