Colgate-Palmolive (CL 1.10%) is a notoriously sleepy company, but the consumer products giant just made an uncharacteristic move by announcing its first billion-dollar acquisition since 1995. Colgate is acquiring European skin care company Laboratoires Filorga Cosmetiques for $1.7 billion. Does this bold transaction represent a change in the company's growth strategy?
Growing its presence in personal care
Laboratoires Filorga Cosmetiques, or Filorga for short, is a premium skin care brand focused on facial care. The company sells a variety of skin care products, such as antiaging creams and daily cleansers, that typically retail between $40 and $100 per item. The company is headquartered in Europe, its largest market, but it also has a strong business in Asia.
Colgate did not disclose Filorga's financials, but analyst estimates ballpark the company's annual sales in the neighborhood of $200 million. In other words, this will be a very small portion of Colgate's total business, which raked in over $15 billion in sales last year. However, Filorga is growing its sales at a rapid rate and is profitable -- which on the margin should help Colgate bolster its growth profile.
The acquisition of Laboratoires Filorga follows other smaller but similar acquisitions. In 2018, Colgate acquired two skin care companies, Physicians Care Alliance and Elta MD Holdings, for a combined $730 million.
Colgate is clearly making a concerted effort to expand its personal care business, especially in skin care. The company is moving in this direction because skin care lends itself to product differentiation and premiumization that can translate into higher margins than those for other types of consumer products.
Image Source: Laboratoires Filorga.
How Filorga fits into Colgate's broader business strategy
Colgate is a global consumer products company focused on oral care, personal care, pet nutrition, and home care. The company's strategy has been to grow organically through innovation with its existing product lines and expanding geographically. The acquisition of Laboratoires Filorga plays to both of these strategic objectives because it gives Colgate strong new brands within personal care and has distribution in over 60 countries.
Colgate is most known for its iconic toothpaste, which still represents its largest source of revenue. The company has long sought to diversify its revenue outside of toothpaste, and the Filorga acquisition furthers this objective. As the table below shows, personal care represented 20% of Colgate's 2018 revenue, but will likely represent a larger slice in the future given the company's recent mergers-and-acquisitions activity.
| Colgate Product Category | Percentage of 2018 Revenue |
|---|---|
| Oral care | 47% |
| Personal care | 20% |
| Home care | 18% |
| Pet nutrition | 15% |
Data Source: Colgate Financial Reports.
The other strategic objective is to expand sales in foreign markets. Filorga generates most of its revenue in Europe and has exposure in Asia. Colgate has a lower exposure in Europe than other geographies and could use the additional business there.
| Colgate Business Segment | 2018 Revenue |
|---|---|
| North America | $3.348 billion |
| Latin America | $3.605 billion |
| Europe | $2.502 billion |
| Asia Pacific | $2.734 billion |
| Africa/Eurasia | $967 million |
| Pet nutrition | $2.388 billion |
Data Source: Colgate Financial Reports.
Taking a bigger-picture view, the acquisition of Filorga fits right in with Colgate's business strategy of brand-focused innovation and geographic diversification.
Colgate's new CEO is making a bold bet
Historically, Colgate has focused on more organic means to drive growth. The Filorga acquisition marks a shift in Colgate's growth strategy, which corresponds with the appointment of a new CEO at the company. Noel Wallace was appointed CEO of Colgate in April 2019 after serving as its president and chief operating officer.
Although it may just be a coincidence, it appears that CEO Wallace is making his mark on the company by making a bold bet through this acquisition. Not only is it a huge international commitment, but it's also being done at a rich purchase multiple -- at least if the analyst estimates of Filorga's financials are somewhat accurate. Therefore, if Filorga doesn't meet its target of rapid and profitable growth, the acquisition may result in an asset writedown in a few years, which would leave a black eye for the company under the new CEO.
After inking the company's largest acquisition in over 20 years, it's also possible that the new CEO plans to employ a new growth strategy more reliant on M&A. If Colgate were to more aggressively employ M&A, it could quickly juice growth, but these bets would need to be financed with debt or equity. Other consumer goods companies have struggled with acquisition-driven growth strategies, but with greater risks come greater rewards.
