If confectioners want to get bigger it seems entirely plausible that those selling toothpaste, indigestion medicine and spot treatments should do likewise. On that basis, the market frisson about a potential merger between the UK’s Reckitt Benckiser, whose household and personal care portfolio includes Gaviscon and Clearasil, and US toothpaste king Colgate-Palmolive has a certain logic.
The maths stack up nicely too. Colgate-Palmolive is bigger than Reckitt, but the two generate broadly similar margins on a gross and operating basis, at about 59 and 23 per cent respectively for the year to end-September. They trade on similar price earnings multiples and both have easily outperformed their respective stock market indices in the past five years. The product portfolios are fairly complementary, although there is overlap in homecare.
The big draw for Reckitt, however, would be on the distribution side – specifically, greater access to developing markets. Some three-quarters of the UK company’s revenue comes from Europe, North America and Australia with less than one-fifth coming from developing markets. Colgate not only sells more in developing markets, which supply almost half its revenue, but does so more profitably. Its operating margins of 32 per cent in Latin America compare with Reckitt’s 13 per cent in developing markets across the board. For Reckitt, that is partly a function of lower costs and simpler tastes in developing markets, but also reflects poor economies of scale. If you bond the two companies together to create a bathroom behemoth, you push up the volumes and can zap inflated distribution costs as effectively as Dettol zaps germs.
Neat maths and strategic logic, however, are not enough. A Reckitt-Colgate kitchen colossus has been regularly mooted over the years, without ever yet coming to fruition. Certain factors now, including recent insider sales at Colgate, make it less rather than more likely. Ultimately, Colgate’s superior size means the easiest way to clinch a deal would be a merger of equals. And as every MBA student knows from day one, there is no such thing.
Brokers don’t need fixing
JPMorgan’s proposed takeover of Cazenove is a good time to wonder whether this is another handmade nail in the well-polished (but discreet) coffin of British corporate broking.
With 36 FTSE 100 companies on its client list, the JPMorgan Cazenove joint venture looks like evidence of the rude health of the peculiarly British discipline. JPMorgan would not put a price of £2bn on the venture if it did not think broking was still a valid and valuable part of the model. But the survival of corporate broking seems to go against City trends.
Brokers such as Cazenove’s David Mayhew are generalists among specialists. They are UK-centric in a globalised financial market. Efforts to export the model have never succeeded in reaching the top corporate echelons. Even in Britain, the prize clients – FTSE 100 companies – are multinationals. Many are headed by foreign chairmen and chief executives who have built their careers without the need for constant whispered counsel from bebrogued Brits. Royal Dutch Shell already operates without a nominated corporate broker, a legacy of its historic dual nationality. In short, as an internationally ambitious young recruit to JPMorgan, UBS, Citigroup or Bank of America Merrill Lynch would you really set your sights on becoming the David Mayhew of 2050?
Perhaps not. But then corporate broking is changing. It is still mainly about the cultivation of an exceptional long-term rapport with key board members. That’s a treasured relationship in bad times, which often leads to more remunerative advisory and transactional work. So JPMorgan wisely binds in Mr Mayhew as JPMorgan Cazenove chairman. But it also plans to develop an integrated model that sounds more like “corporate finance with Cazenove characteristics”. If it can sell that internationally then corporate brokers – or their subtly evolved descendants – could survive to serve a broader clientele.
On paper, a bad idea
Alas, the financial services bill contains no detail about how the government intends to “tear up” bankers’ contracts. Will it be a conventional sideways rip, or the more satisfying but technically more demanding lengthways method? And what of the unintended consequences? Will the measure lead to a surge in the issue of laminated contracts – proof against even the most furious Treasury minister – or will banks stick with the time-honoured gold-plated variety?
Get alerts on Companies when a new story is published