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M&A Strategy

AB InBev SABMiller logo

Energy and persistence conquer all things (Benjamin Franklin)

After four unsuccessful bids, it is befitting that the deadline set by the U.K.’s Takeover Panel for beer giant Anheuser-Busch InBev NV to submit a fifth and final offer for SABMiller Plc. was extended to 5 p.m. GMT on 11th November : Armistice Day !

Sabmiller-share-priceRumours that AB InBev were about to bid for SABMiller started over twelve months ago, gaining substance shortly afterwards. What ensued was a succession of bids of ever increasing value to seduce the initially reluctant shareholders of SABMiller – until they surrendered to a staggering offer of USD 107 billion, or £ 71 billion. They can hardly be blamed for grabbing the cash and running, given that SABMiller’s share price at the end of November stands 37% higher than it was on 14th September, as a direct result of AB InBev’s mounting bids. Whilst SABMiller’s share owners might drink to celebrate having realised value growth earlier than expected, many other stakeholders are guaranteed a nasty hangover as a result of the forthcoming merger.

The combined business is set to rake in annual revenues of USD 73 billion, which is more than companies such as Pepsico or even Google. But more importantly, the integration of the two companies aims to generate annual cost synergies of USD 1.4 billion, a significant part of which will come from headcount cuts. With AB InBev employing 155,000 people worldwide, and SABMiller a further 70,000, it is easy to imagine how much duplication there will be at headquarter level as well as in many back-office functions. Having paid 15% more to acquire SABMiller than their initial bid of £ 38 per share, there is no doubt the pressure to realise the cost synergies very fast will be extreme.

A foreseeable domino effect on the beer market

Combined-brandsBeyond the USD 1.4 annual savings, much of the business case underlying the acquisition of SABMiller rests on growth in Africa and Latin America. This is because AB InBev cannot expect much growth in Europe and North America where consumers are beginning to seek product differentiation and thereby generating growth at the other end of the beer market spectrum : micro-breweries or so-called “craft brewers”.

Nonetheless, the combined companies’ market share in North America and the fact that AB InBev own wholesale distributors in several states of the USA might be sufficient to restrain the route to market of many smaller players and this may reduce consumer choice in bars and retail outlets; so this could be bad news for those who have thus far developed well by offering consumers something that differs from the usual mass product.

Global market share of five biggest beer companies

Anheuser-Busch InBev – 20.8%

SABMiller – 9.7%

Heineken – 9.1%

Carlsberg – 6.1%

China Resources Enterprise – 6%

Source: Euromonitor, based on 2014 figures

In spite of SABMiller selling its stake in a venture with Molson Coors for USD 12 billion and thereby letting go of the Coors and Miller brands, the combined AB InBev and SABMiller will be selling one in every three pints of beer worldwide, leaving a huge market share gap between themselves and the next player on the podium. Heineken and Carlsberg must now be furiously re-thinking their strategies; a number of other takeovers and mergers will inevitably happen as the industry seeks a new equilibrium.

According to Bart Watson, chief economist at the Brewers Association, there are already rumours about a Heineken and Molson Coors tie-up as these two companies are now seeing their main competitor become even bigger. Others are likely to follow. Some companies such as Diageo, which is now focusing on its spirits business, could stand to benefit from this new wave of upheaval on the beer market by finding an acquirer prepared to pay over the odds for Guinness as the few remaining global players grapple to keep pace with AB InBev / SABMiller. Interesting times ahead…

Africa : two different interpretations of public health

My thoughts regarding the impact this merger will have on consumer choice have not changed since the blog I published in September 2014 (“Something big could be brewing”), but one new aspect which is now surfacing is the very strong opposition and criticism of the merger which is now emanating from public health circles regarding the African continent, which is a critical growth area in the combined company’s strategy. According to Dr Jeff Collin, director of the Global Public Health Unit at the University of Edinburgh, the AB InBev SABMiller merger aims to “exploit Africa’s low per capita consumption of beer” by targeting low income consumers to generate sales growth.

drunk-300x251In an article published in the British Medical Journal, a team of experts warn of “disturbing implications” relating to the growing alcohol related harm being witnessed in low and middle income countries. And therefore the issue is not specifically African, but also affects other regions targeted in the combined company’s growth plans, notably Latin America and China, the latter being the world’s largest beer market in which SABMiller has a joint-venture producing the country’s Nr 1 beer brand, Snow.

Unsurprisingly, SABMiller see things very differently, stating that more than half of the alcohol consumed on the African continent is what they call “informal”, in other words beverages produced in unregulated facilities, ranging from home made beer brewed in a back yard to dubious distilled beverages containing potentially dangerous by-products such as methylated spirits, reminiscent of the Moonshine that was distilled during the Prohibition in the USA. Based on that premise, SABMiller see their mission as a noble task; as per their spokesperson: “The backbone of SABMiller’s growth strategy in Africa is to ensure the affordability of our beers so that local, low income consumers move from drinking poor quality, and potentially lethal, alcohol to enjoying our high quality beers made with local ingredients.”

Many people will consider that strategy to be a little cynical; but there is one undoubtedly positive element in that statement: “local ingredients”. In the beer industry, the supply chain costs can be a substantial component of the value chain because of the unfavourable weight/volume to value ratio. Consequently, unlike wine and distilled beverages, there is a strong incentive for beer to be produced locally. And that, for emerging economies, is better than burdening the balance of trade with the cost of imported drinks.

Money now vs. safeguarding against a possible longer term threat

Beer on tapAs in the more developed economies, low and middle income economies will see a growing tension between the priorities of their public health programmes and the fiscal requirements of their treasury; migrating the production of beer from back yards and speak-easy environments to a registered and regulated business is a source of corporation tax and possibly some form of alcohol tax as well. This also promotes employment in hygiene conscious factories, which is also important in developing economies.

The authors of the article in the British Medical Journal argue that company’s proposed expansion in low and middle income countries “echoes that of transnational tobacco companies” whilst benefiting from less stringent regulation and controls. That might be the case, but faced with the dilemma of choosing between the certainty of a stream of income and the longer term avoidance of a possible health risk, I will not be surprised if the said low and middle income economies will welcome the growth of AB InBev/SABMiller in their respective countries.

Even in the absence of strong political opposition to the merging of the world’s two largest players, implementing the integration of these huge businesses will be a monumental task. Let’s wish them luck (and perseverance), and hope this will not end up with a big hang-over for all those involved. If it does, maybe the other mega-merger which is currently under discussion, namely the USD 160 billion bid by Pfizer to acquire Allegan, will be able to provide the cure to that hang-over!

Similar origins – different trajectories

Ferrero’s bid for Thornton’s marks the end of just over one century of history, as yet another British chocolate household name will be swept up by a foreign group, following in the footsteps of Cadbury in 2009 and Rowntree in 1988.  This will leave the relative newcomer Hotel Chocolat as the only significant specialised independent British owned chocolate manufacturer and retailer.

Thornton shop windowBoth Thornton and Ferrero began as little corner shops; their history is closely associated with their founding families.  But that is probably where the comparison stops.  Whereas Ferrero developed over the years into a formidable marketing machine, a game changer in the chocolate industry, Thornton remained anchored in tradition.  Oddly, it is that traditional image that appears to have attracted Ferrero; the remaining question being whether Ferrero will manage to brush away the “dusty” and “passé” aspects of that tradition, and fully exploit the concept of “authenticity” that underlies tradition.  Given their strong track-record as powerful communicators, transforming the image of Thornton’s is probably not beyond Ferrero’s reach, but it will be quite a task…

Once an up-market purveyor of luxurious chocolates, Thornton’s appears to have dispersed itself over the years, opening its own retail boutiques and diversifying into other categories of indulgent foods, notably ice cream.  In doing so, at no point did Thornton lead or even anticipate consumer trends, thereby missing the shift in taste preferences towards darker and more bitter chocolate compared to what consumers demanded in the 1980s and 1990s, and leaving the door open for the likes of Lindt to occupy that space.

Retail chains – Thornton’s last (and failed) attempt

With sales volumes declining below the critical mass that would be required to profitably run its large Derbyshire plant, and with insufficient cash-flow to justify its large network of retail boutiques, Thornton decided to aim for a step change in sales volumes by entering large retailers, without fully thinking through how their presence in hypermarkets and discount outlets might impact the brand’s already eroded premium image.  Transacting with giants such as Tesco requires a skill set, supply chain efficiencies and ways of working which Thornton appear not to have grasped, and therefore the mass retailer strategy that was supposed to revive Thornton after many years of continued declined turned out to be a failure.

There are only so many successive profit warnings a company can issue before it loses all credibility with its shareholders.  Thornton was getting to that point, and the arrival of Ferrero in that troubled environment can be considered as the deus ex machina  that will hopefully prevent Thornton’s from going into terminal decline.  By the own admission of Thornton’s former Chairman Peter Thornton, grandson of the chocolate maker’s founder, without Ferrero’s offer “The decline in performance would have continued and I think the decline would have been fatal.”

Radical change for Ferrero too

Yes, this stuff really tastes of hazelnuts
Yes, this stuff really tastes of hazelnuts!

The decision to make a significant acquisition to fuel growth marks a radical change in strategy by Giovanni Ferrero, months only after the passing away of his father who founded the company back in the 1940’s and became Italy’s richest citizen.  Until now, the Ferrero empire had grown organically and its acquisitions were focused on increasing production capacity and securing the supply of ingredients: today Ferrero is the world’s biggest consumer of hazelnuts, with 25% of the world’s annual supply used in its production plants. So why depart from such a brilliantly successful strategy?

Ferrero see value in Thornton's where the latter's shareholders had lost confidence (graph source Google finance)
An offer too good to refuse

Giovanni Ferrero argues that the acquisition of Thornton’s will pave the way for Ferrero to rapidly get a strong foothold in Britain, a market where the per capita consumption of chocolate and confectionery in general is high.  However, it did not take any acquisitions for Ferrero to become extremely successful in Germany where the retail scene is harsh and competitive, so why acquire a struggling company to develop in the UK?  Maybe there is an intention to gradually reduce the group’s reliance on Hazelnuts, the price of which has risen steadily in recent years.  That, combined with fluctuating costs of cocoa caused by failed crops and the risk of a global shortage within a decade, means that some diversification may pay dividends over time, branching out in sweets and other types of confectionery.

Seeking the common ground

In the meantime, it will be interesting to observe how the quintessentially British Thornton company will fold into the Ferrero Group which bears the hallmark of its founding family and of Giovanni Ferrero, heir of the Ferrero dynasty, who appears keen to affirm his strong leadership.  Ferrero have stated that the Derbyshire factory will be maintained, but have not commented on how much may change within its walls. However, as the world continues to gobble up ever increasing quantities of Nutella®, Kinder® chocolates and TicTac® sweets, the underused capacity in Derbyshire may be put to good use.

Importantly, no comment has been issued as to where the British company’s management will be located, nor what its remit will be within the Ferrero group.  That was probably wise as it may take a while to determine how much of a shake-up is required to rectify Thornton’s past errors, put the brand back onto a path for success, and use that platform as a Trojan Horse to accelerate the growth of Ferrero’s product portfolio in the UK.

Meanwhile, an imaginative competitor is succeeding where Thornton failed

Hotel Chocolat: a touch of class
Hotel Chocolat: a touch of class

An interesting example that brilliantly illustrates the value and potential of differentiation is the emergence and rapid growth in the UK of Hotel Chocolat since 2003.  Previously named Choc Express (see how some names can project a sense of premium exclusivity and others convey mere convenience), Hotel Chocolat opened its first retail boutique in Watford (not in London’s Bond Street which is more suited to super-premium brand Godiva), and has focused on the premium end of the chocolate market, with strong visual appeal and a packaging that is miles away from the traditional (boring) box of chocolates that can be found on any supermarket shelf.

Thornton's: traditional or "passé"?
Thornton’s: traditional or “passé”?

To further distance itself from mass market chocolate manufacturers, Hotel Chocolat acquired it’s own cocoa plantation on the West Indies island of St Lucia in 2006, on which it opened the Boucan Hotel four years ago.  So yes, there really is a “Hotel” Chocolat and, more importantly, there is a space on the seemingly mature and crowded chocolate and confectionery market in the UK for a new-comer that arrives with fresh, fun ideas and can satisfy the consumers’ desire for self-indulgence.  Hotel Chocolat received the Emerging Retailer of the Year award from Retail Week, and was also nominated as one of Britain’s CoolBrands®, voted for by marketing experts, business professionals and thousands of British consumers whose input was collected by the Superbrands UK panel.

A quick glance above at the illustrations of this year’s Thornton’s and Hotel Chocolat’s summer collections as published on their respective websites leaves no doubt as to which of those two brands has knocked the other off the pedestal of premium chocolate brands.

So what’s next?

As a privately owned company, Ferrero does not need to disclose its strategy to the world, and nobody at this stage can be certain of what is going through Giovanni Ferrero’s mind.  Does he really intend to revive the Thornton brand?  Can the Thornton retail outlets be used as a channel for a premium Ferrero/Thornton range whilst Nutella, Ferrero Rocher and Kinder® products continue to flow through high-street shops and retail chains?  How important are the Derbyshire factory and the know-how of some of its staff to Ferrero’s global manufacturing foot-print?

My many years spent at Diageo, and in United Distillers before that, have given me a number of opportunities to see how difficult, painstaking and costly it can be to attempt the revival of a tired brand.  Tired brands often enjoy a high level of notoriety, and many marketers will see this as a fantastic short-cut compared to the time and investment it usually takes to build any awareness of a new brand. But what if a brand is renowned for all the wrong reasons?  Changing well anchored perceptions can be more difficult that building a brand image from scratch.  If Ferrero manage that feat with Thornton’s, they will again have proved their marketing genius.

Meanwhile, let us hope that Thornton’s decline will not be accelerated by the upheaval caused by their integration into the Ferrero group, and that the latter will not get distracted by this integration to the detriment of its sharp marketing and sales focus.  That will depend on how well the post acquisition integration will be planned and orchestrated.

Baked beans on toast for two of the world’s richest men

Kraft-Heinz-Main-BrandsBrazil’s richest man Jorge Paulo Lemann has teamed up with Warren Buffett to engineer a deal to merge with Heinz which will not generate much enthusiasm amongst the gourmet elite of this world.  But the Kraft Heinz merger has everything it takes to get financial markets excited, with the promise of USD 1.5bn annual savings by 2017 and combined sales of USD 29bn, making the future group North America’s third largest food and drink company and the world’s fifth.

Two unknowns remain.  Will the Kraft Heinz Company manage to generate growth beyond the annuity it will derive from savings in overhead costs?  And can it develop new product lines to evolve away from the very 1970’s image that characterizes much of the present range?

Why Oscar Mayer dogs, Mayo®, HP Sauce®, Jell-O®, Philadelphia® and Kool-Aid® can still generate billions

Changing living patterns and the increasing involvement of women in full-time employment created fast growing demand for time-saving foods through the 1950s until the early 1980’s; this was an era of instant coffee and Wonder Mash® which also witnessed the global expansion of fast-food restaurant chains.  But the world has moved on since the days of Macaroni and cheese.  Improvements in Supply Chain efficiency combined with advances in food science now allow supermarkets to offer a broad choice of ready meals of increasing sophistication.  Today, “convenience” also includes anything from fresh ready-to-eat mango salad to ready-to-cook peeled vegetables, as well as meal modules which consumers can combine to produce healthy balanced meals, with a starter, a main course and a dessert if they so desire, that provide the taste, nutrition value and visual appeal of the “real thing” without all the fuss of starting with basic ingredients.

So with every consumer survey telling us that people are now opting for organic or at least more natural foods from sustainable sources, and with the abundance and variety of quality foods on today’s supermarket shelves, how is it that companies such as Kraft and Heinz still manage to achieve sales that combine to USD 29 billion?

Kraft’s broad portfolio of brands will add to the Heinz range.
Now spot the missing item : the healthy option

Part of the explanation is to be found in the significant price gap between today’s high quality fresh products and run-of-the-mill heavily processed foods.  The average household’s budget priorities have changed over the past decade, with electronic gadgets, leisure and entertainment claiming an increasing share of the consumer’s wallet.  It is tempting for large families or for those on lower income to make savings on food when cheap alternatives can provide the same feeling of satiety at a fraction of the cost of the fancier items beautifully displayed on the supermarket shelves.

Secondly, one also needs to bear in mind that decades of mass-produced processed foods have created a degree of addiction to sugar, fat and salt, so that the consumers who opt for a large plate of French fries smeared with a generous layer of Heinz Ketchup may do so by choice rather than as a result of financial constraints.

There is, however, pressure from all sides to move consumers away from the heavily processed and generally unhealthy types of foods that come off the production-lines of companies such as Heinz and Kraft.  Eating habits do not change overnight, but the change will happen gradually.  Increasingly, the cost saving will become the only justification for buying “junk” food, and when that is the case, consumers guided by the need to make savings might opt for a supermarket’s own brand or a completely generic product rather than “premium branded” processed food.  This is not good news for the future Kraft Heinz Company in the longer term.

Management style will change things faster than eating habits

When Brazilian 3G and Warren Buffet’s Berkshire Hathaway acquired Heinz in 2013 and took the company private, it must clearly have been part of their plan to make another acquisition in that sector to create a paradigm shift within Heinz and change the balance of forces on the market.  Merging with Kraft turns that potential into a reality.  The shake-up is about to begin.

Jorge Lemann
3G’s Jorge Lemann
Warren Buffet
Warren Buffet

3G have acquired a reputation for very aggressive cost cutting, not just the excess or even the frills, but deep cuts everywhere possible whilst also challenging the priorities and seeking solid justification for any capital project or major item of expenditure.  Advertising costs are therefore most likely to be put under close scrutiny.  In my first job in the 1970’s as advertising research executive in one of London’s major advertising firms, my line manager told me “advertising is a unique product: we don’t know how it works, the client cannot tell for sure whether it works or not, and if it doesn’t the client doesn’t get his money back”.  3G surely won’t see it that way and today’s advertising gurus will need to come up with convincing reasons to justify every dollar of advertising spend if they want to retain the Kraft Heinz Company’s account.

Once the fat and duplication has been trimmed off the combined business and further savings are achieved through wiser allocation of sales and marketing funds, let us hope that the Kraft Heinz Company will re-invest some of their USD 1.5 billion annual saving into developing new lines of food to regenerate their portfolio, fuel longer term growth, and preserve the notoriety of those household brand names.

No celebrations for the banks this time

As not all mergers end up being successful, conventional wisdom would say that mergers and acquisitions present shareholders with the potential for value creation, whereas they offer banks and advisers immediate value through fees and financing arrangements.  The deal struck by Warren Buffett and Jorge Paulo Lemann is about to cause a serious dent in that conventional wisdom.

A merger of the magnitude of Heinz and Kraft’s would normally be toasted with champagne by the investment banks whose names invariably pop-up each time a deal is struck.  But in this particular case, the only toast will be the one covered in humble Heinz baked beans, because the two giants behind the deal are sitting on huge cash reserves and will not need big financing.  This means that Wall Street’s major banks will all miss out on their share of what is currently being tagged as the biggest M&A deal of 2015.

Oh well, we’ve only just reached the end of Quarter 1, there is still some time for other big guys to spark off a few more “biggest M&A deals of 2015” during the coming nine months.

Travelocity gnome

Expedia logoA giant eats the Roaming Gnome

With the news this month that Travelocity’s Roaming Gnome has become part of Expedia’s large portfolio of on-line travel companies, markets are now speculating whether this latest grouping will spark-off a domino effect across the on-line travel industry, and wonder what this will mean for all of us: the travellers.

Initially set up by Sabre Holdings 18 years ago, Travelocity revolutionised air travel by becoming the first web platform that gave consumers the ability to buy their air-tickets without going through a conventional travel agent – something which now appears quite normal to all of us but which has transformed in depth the way we travel, and has kept airlines on their toes ever since.

Travelocity is the second on-line business to have been sold by Sabre Holdings in as many months, having already disposed of in late 2014.  Just as Sabre’s competitor Amadeus did in 2011 when it sold to a private equity consortium that then merged it with eDreams and GoVoyages to form OdigeO, Sabre appear to be moving away from the front-end applications; they will concentrate on their transactional back-end systems that process airline tickets sales, car rentals and hotel reservations, rather than the more marketing-oriented consumer-facing activity of generating those sales.  Does that mean that Travelocity’s iconic Roaming Gnome has lost some of his magic?

Whilst Travelocity’s brand awareness remains one of the highest in North America among on-line travel operators, the rapid emergence of numerous competitors in the past 15 years has caused the industry to fragment.  Travelocity did not manage over that period to maintain its share of what was nonetheless a growing market, and let go of several thousand employees to remain afloat.

Seeking Salvation through an Alliance: Partnership or Shackles?

Travelocity LogoIn 2013, a weakened Travelocity signed a partnership deal with rival Expedia which allowed it maintain its independence in terms of sales and marketing but handed over the search engine activity and data processing over to Expedia.  From then on, the two brands sharing one engine would be conjoined twins, with two personalities but one back bone. Such an alliance can of course generate significant synergies in terms of sharing costs, in particular for the continuous development of systems which constitute a considerable part of on-line travel companies’ operating costs.  However, beyond seeking cost synergies, there is even more to gain for on-line travel companies by focusing on top-line growth and generating not just more sales of travel services but improving the ir other key stream of revenue: contextual advertising.

The type of search an on-line user makes on a travel website says much about that person’s circumstances, preferences, economic status and possibly that person’s mood too: what a perfect opportunity to select and display the advertisements that will really hit the mark!  On-line travel operators can feature advertisements for goods and services that correlate perfectly with the user’s travel enquiry, and display these when that user is most receptive to their message. As such, advertisers are prepared to pay a high price in terms of cost per thousand contacts, because the targeting of those contacts is incredibly more focused than could ever be achieved with other “blanket” forms of advertising, such as magazines, outdoor posters or audio-visual media.

To capture that significant part of Travelocity’s value-chain, there would have been few options for Expedia other than to acquire roaming gnome’s company and take control of its marketing and its sales of marketing space.  Conversely, having relinquished its search engine and transaction processing and handed those activities over to Expedia, it would have been hard for Travelocity to extricate itself from a partnership that did not offer much of an exit opportunity.  This may explain the relatively modest price of USD 280 million paid by Expedia to acquire the Roaming Draft, not an insignificant sum of money of course, but quite lacklustre all the same in the world of on-line leisure compared to the impressive USD 2.6 billion paid last year by Expedia’s competitor to acquire the on-line restaurant booking service OpenTable.

Can the “Win-Win” be a Win-Win-Win?

Partnering Travelocity with Expedia will have turned out to be a smart move for Sabre Holdings: joining forces allowed Travelocity to enjoy top-line growth rather than continue to dwindle; since from that angle Sabre Holdings were given USD 280 million cash on the table for a business that might otherwise have experienced continued decline.

Expedia have paid a very reasonable sum for a brand that enjoys strong consumer awareness and an unrivalled and very unique visual personality: the Travelocity Roaming Gnome introduced in 2004 was temporarily phased out but brought back to prominence shortly afterwards when Travelocity changed advertising agency and fully realized the power of that brand figure.

A perfect win-win some will say.  But what about us, the millions of travellers who use these services to roam the world, not as Gnomes but as tourists or business travellers?

Unlike packaged consumer product brands that merge to gain clout in their fight for space on supermarket shelves, on-line travel companies benefit from appearing to the public as being quite fragmented.  This is because unlike the finite length of a supermarket display, the virtual world of the internet offers almost infinite space; and in a market where the customer is seeking the best deal, the ability to compare deals not only within one platform but also across several platforms is of paramount importance.  One way of capturing a bigger share of the market is therefore to offer several platforms as this increases the chances of any user browsing at least one of them when seeking information to plan a trip.   Multiple platforms also allow one same provider to offer users a choice of visual styles and navigation experience, to suit the diverse preferences of consumers., OpenTable, and Kayak all belong to Priceline Group, while Orbitz Worldwide owns,,,, and in addition to their initial platform.

Travelocity gnomeSo will anything change for us travellers who use these on-line travel platforms regularly?  Probably not.  Rumour has it that Orbitz may be acquired soon.  On-line travel companies have moved on from being turbulent start-ups to becoming heavy-hitter companies.  Competition in that industry is fierce – and that is good for consumers.

So yes, this could just be one of those acquisitions that actually benefits the seller, the acquirer and the consumer.  If this really is a win-win-win, the time may have come for the Travelocity roaming gnome to begin to smile.

And exciting 2015 looms…

In recent weeks, early signs of big changes to come in the UK’s telecom landscape have sparked off speculation as to which of the key players might join forces, or possibly even quit the UK scene to re-invest elsewhere.  Why now?

UK consumers and businesses enjoy one of Europe’s most competitive Telco market, due to the number of operators and presence amongst them of some game changers, such as Talk-Talk, who upset the cosy rules that prevailed on the market when British Telecom had to give up its monopoly.  Such competition obviously leads to meagre margins, and the belief of many of the operators is that end-users need to be offered a “bundle” of services, covering fixed and mobile telephone, internet access and on-line TV content.

logo_telecomsJust in the same way mobile phone tariffs are difficult to decipher, those all-in-one “quad” service bundles blur the cost of each of the services; and so the proliferation of such bundle offers in recent years is possibly better explained by the fact that they protect the operators’ margins rather than offer the end-users any tangible benefits.  If that were not the case, the take-up of these new bundle offers would have seduced more than the current 17% of users who have subscribed to them.  Selecting a common supplier for fixed telephone and broadband makes logical sense, particularly with the generalisation of voice over IP, but I strongly suspect that the choice of mobile provider is also strongly influenced by territory coverage (which is still quite imperfect in the UK), roaming tariffs and the choice of features offered by the operator, rather than a supposed simplification resulting from having just one supplier for all of the services.

Join forces, stay as is, or quit?

Telecom operators have not had it easy in the last few years; websites and on-line applications require ever increasing flows of data as digital content is consumed through real-time streaming, forcing the providers to offer ever-growing bandwidth for which the end-users are not prepared to pay any more than they did in the past.

Whilst the strong competition that has prevailed thus far in the UK has created a very favourable environment for end-users by keeping prices down, the margins generated on the UK market are probably insufficient over time to allow the massive and continuous investments that will be required to satisfy the users’ appetite.  If bundling fixed telephony, broadband access, mobile telephony and digital content is the only way of protecting the revenue required to growth further and survive in this very demanding market, dedicated mobile operators such as Vodafone, O2, Three or EE, will need to seek alliances to gain presence across the spectrum of telecom services, and this will require them to have cost effective access to fibre networks.

Vodafone has already taken a few steps in that direction with the recent acquisition of Ono in Spain and Kabel Deutschland, so it would only be logical for that company to seek a similar move in the UK to build further on its 2012 acquisition of Cable & Wireless.  Current speculation about Vodafone making a bid to acquire Liberty Global, which operates Virgin Media in the UK as well as very high-speed broadband networks in ten other European countries, would allow Vodafone to leapfrog ahead of its competitors. If the regulators don’t object to such a concentration of control over fibre networks in Europe, the other players will be forced to either rent the networks owned by BT or Vodafone, or pull out of the British market.  Building an alternative broadband fibre network would be another possibility, but it could prove prohibitively costly, unless that third offering were limited to a few large conurbations where the density of users might justify the huge investment.

One thing is certain.  If Vodafone teams up with Liberty Global, the other mobile operators will not survive on a status quo and will be forced to move.

Exit the UK market, really?

What would have sounded inconceivable a year or so ago is becoming a distinct possibility; or at least it is envisaged by EE, the joint venture of Orange and Deutsche Telekom, as well as by O2.  Both companies are reported to be exploring the possibility of selling their UK businesses to BT and exiting the exceedingly competitive British mobile business, to seek their fortunes elsewhere, in countries where a consolidation of fixed and mobile telephony with broadband networks may be easier to achieve rapidly.

If the so-called “quad” bundles of services are really the panacea that will allow telcos to thrive in Europe, then something big is likely to spark-off during 2015, but the magnitude and complexity of any deal, as well as the scrutiny to which such deals will be inevitably submitted by the regulatory authorities, means that the European telecom landscape may take much longer before any radical change really materialises.

Yahoo logo

What next big decision for Marissa Mayer?

Now that Yahoo! Have cashed in on the sale of 140 million shares of Chinese on-line retail giant Alibaba (subject to a one-year lockup), there are fears – or hopes –  that once she has fulfilled her promise of returning part of the cash of that sale to Yahoo!’s shareholders, CEO Marissa Mayer may make use of the rest of the cash to finance a merger with AOL, in line with a string of other acquisitions she made in recent years. Among those hoping for such an outcome is the well known investor activist Starboard Value LP who insist that combining the two organisations would not create synergies in the order of 1 billion US dollars in addition to being a tax efficient means of monetizing Yahoo!’s stake in Asian companies.

Yahoo logoThat is always a nice annuity to pocket in the future, but what is really at stake is future growth, rather than a one-time efficiency improvement, and when it comes to growth, both Yahoo! and AOL have been lagging behind the market leaders, thereby allowing the gap to grow ever wider.

So how are future prospects expected to rebound as the sole result of merging to relatively slow growth mammoth businesses?

“Merger”, really? Once bitten twice shy

It is hardly surprising that  AOL refused to comment on Starboard LP’s recommendations, having suffered during what Time Warner’s Jeff Bewkes himself qualified as the “biggest mistake in corporate history” in their 2001 merger that created AOL Time Warner, supposedly a merger of equals that would bring together a huge base of subscribers with “network access”, “search” and “content”.  AOL was also supposed to be a catalyst that would accelerate Time Warner’s slow rate or growth.  The struggle to deliver that dream began almost immediately, a dream that was short-lived as Time Warner spun off AOL in 2009.

AOL Investor relations logo
AOL’s shareholders are unlikely to warm up to the idea of a take-over by Yahoo!

After such a dire experience, I suspect AOL’s shareholders will think twice before attempting a repeat which based on a thinking not too dissimilar to the rationale underlying their ill-fated association with Time Warner in 2001, even more so as the word “merger” is quite semantic for what is in reality bound to be a mere “take over”.

Whilst most of the media coverage about this potential deal refers to a “merger”, Yahoo!’s market value runs at $40.5 billion compared to AOL’s mere $3.5 billion, so this would most likely be the former merely snapping up the latter, particularly as Yahoo! is sitting on $9 billion of cash. Consequently, AOL would dissolve within the greater Yahoo! galaxy.

Yahoo! might as a result feel like renaming itself “Yahoo+” to reflect that it is striving to become a better and faster growing company offering a more comprehensive range of services to on-line users, mainly though AOL’s recent acquisition of offering on-line video programming.  But will this “+” really be a plus for internet users and therefore for Yahoo! or more simply a huge distraction for management when the real prize of the game is to return to accelerated growth?

The value proposition and ingredients of growth

Yahoo messenger logo

Some might believe that Yahoo!’s growth performance was actually quite good in recent years, however many analysts will contend that Yahoo! owes much that apparent good track record to the phenomenal contribution of its investment in Alibaba.  Now that this valuable contributor to Yahoo!’s bottom line will no longer play that part in the future, something else is needed to fuel growth: either the acquisition of another high growth business, and/or learning to become a growing business again by itself again.

Value and fast growth in the internet world come from getting first-mover advantage when introducing innovative services or totally new ways of approaching something that already existed under another form. The real problem, for Yahoo! and AOL, is that the market leaders that are raking up the world’s digital advertising money are Google and Facebook, who repeatedly invent things most consumers did not even know they wanted, thereby growing the gap between themselves and the rest of the market.

Internet research company eMarketer estimates the global value of digital advertising spend to be approximately $140 billion, a third of which is captured by Google, with the number 2 player being Facebook, considerably lower down the scale but with a nonetheless respectable 8% market share.  In the event of a merger, AOL and Yahoo!’s combined market share would bring them to a mere 3.5% share based on their 2013 positions from which they have both declined. That would make them the N°3, but still miles behind the two leaders…

AOL LogoIn many global industries, the game is played between N°1 and N°2 on the market, and life can be considerably more challenging for N°3 and next followers, particularly where the gaps in market shares are significant, as they are in the case of digital advertising which is really a case of Google, Facebook and “all others”.

Those who believe that “size matters” will not be led to believe that pulling Yahoo! and AOL together will suffice to catapult Yahoo! back to the glory of its early years.  There needs to be more, something that would make Yahoo! nimble and capable of jumping into new opportunities before either Google or Facebook can occupy those spaces as they emerge.

So if it’s not growth, then what?

Following the sale of the Alibaba shares, Starboard Value LP’s Jeffrey Smith argues that Yahoo!’s tax structure is inefficient to the extent that $16 billion of additional value could be derived from more tax efficient deal structures whist monetizing its stakes in Asia. I find that number quite incredibly high but agree that most companies in this world have scope for tax efficiency improvements in their legal structures and the way they construct their M&A deals, so I’ll leave Jeffrey Smith with the argument he puts forward.

The counter-argument, in my opinion, is that in the same way as the potential $1 billion saving in overheads, tax savings are an annuity which changes the height but not the slope of a company’s value curve over time.  So yes, there may well be a lot of money to be gained over the next 3 years by implementing Jeffrey Smith’s recommendations, or one may ask oneself where Yahoo! (or “Yahoo+” for that matter) will be positioned in 5, 10 or 15 years from now.

There is probably no right or wrong answer.  Most of us would have been hard pressed in 1999 to imagine the breadth of uses and applications the digital world offers us today, let even how things will look by 2025 or 2030.  So some will follow Jeffrey Smith’s view which equates a “go for it now and adjust later as circumstances require”, others will take a more strategy view and start thinking about what it will take – internally and/or through some acquisitions – to give back to Yahoo! the energy, saliency, innovative image and apparent invincibility of its early years.

One thing is certain: Marissa Mayer must be under tremendous pressure now to do “the right thing”, whatever the future will judge that right thing should have been.

A lasting rumour may be turning true

AB InBev, the giant that towers over the global brewing industry and is more of an M&A machine than a beer producer, is believed to be preparing to bid for rival SAB Miller in what could be a deal exceeding $120 billion.

The group, which developed at an exponential rate over the last decade, began with a fairly modest acquisition 25 years ago of a local Brazilian brewery for $60 million, and has been snapping up its competitors regularly ever since.  The first quantum leap occurred in 2004 when Ambev was combined with the Belgian based group Interbrew.  The result was a formidable M&A engine that won a hostile bid to take-over Anheuser-Busch for the handsome sum of $ 52 billion in 2008, propelling the group to the world’s Nr 1 position.

Conventional wisdom would say that this is where the game ends.  Not so for AB InBev who have had their sights on market’s Nr 2 SAB Miller for some time.

Could so much beer give the regulators a hang-over?

ab_inbev_brandsAB InBev’s power is very much centred in the Americas, where the growth prospects of a mature beer market are slowing down, whereas SAB Miller enjoys a very strong position in those markets that still have the potential to fuel substantial growth, notably in Africa.  Consequently, although the combined group would be capturing around 30% of the overall world market for beer, the only area in which the combined market share is likely to be considered excessive is North America where SAB Miller could be asked to divest brands that currently enjoy a strong market position, such as Miller Coors, without causing a significant dent in its presence in other geographies.

An unwilling bride

The key factor preventing AB InBev from snapping up SAB Miller is the latter’s resistance.  To protect itself, SAB Miller tried earlier this year to repel the prospect of being taken over by AB InBev by bidding for the other giant of the beer industry: Heineken.  However, that bid underestimated the fact that Heineken has a controlling shareholder who takes pride in the global brand’s independence and firmly intends to keep it that way.  Consequently, SAB Miller will not reach the big fat size it was hoping for to avoid being swallowed up by AB InBev, and as recent history has shown us, AB InBev is not one to be discouraged by the reluctance of its acquisition targets: their successful hostile take-over of Anheuser Busch in 2008 showed the world that the unthinkable can indeed happen.

Sending out confusing signals

All the noise surrounding SAB Miller has boosted that group’s share price by 40% since the beginning of the year, and shares in AB InBev rose to a record level on 19th September, fuelled by the market’s expectation that a bid to grap SAB Miller, if launched officially, could well succeed.  In that context, the news that the group’s Chief Strategy Officer and several other high-ranking directors of AB InBev sold significant stakes in their company earlier this month sent out a rather confusing message to the market.  For some, this could be a sign that AB InBev has thrown in the towel, at least temporarily, and will not press on to acquire SAB Miller.  On the other hand, this could also be a ploy by AB InBev to relieve market pressure and let the SAB Miller’s share price slip back to a more sustainable level before pouncing again on its target.

After all, the directors who sold some of their AB InBev shares have earned a handsome profit in doing so, and if they renew their attack on SAB Miller in a few months again, they will profit a second time on the remainder of their shareholding.  So this is a little game which can hardly go wrong.

A big Goliath, many healthy vigorous small Davids, and nothing in between

ab_inbev_logoAB InBev have built and demonstrated a remarkable ability in the area of cost cutting; there is no doubt that an acquisition of SAB Miller could generate further significant savings that would make the $120 billion deal worthwhile – after all, the guys at the helm of AB InBev have become absolute masters in the art of M&A and have not so far ever got it wrong.  It is quite appropriate that AB InBev’s logo should include a hawk…

The fact that Anheuser-Busch, Bass, Beck’s, Corona, Presidente, Grolsch, Bavaria, SAB, Miller and Foster’s could all belong to one same group does not seem to worry consumers who still have their personal preferences for one of several brands of this vast portfolio.  Indeed, the scale achieved by AB InBev alone allows the group to invest in developing new brands, new tastes and fashions, that will continue to enjoy a strong brand equity that sets them apart from the mainsteam products of that industry which are almost a commodity.  And next to the mammoth giants of the industry, there is still plenty of space for more and more local specialised “craft” breweries to sprout up everywhere, appealing to consumers that see themselves as more discerning, and providing a sense of authenticity in contrast to mass produced global brands.

Those who will feel the pinch, and either get engulfed in the AB InBev maelstrom in coming years or go bust, are those local or national brewers that are “neither here nor there”, who cannot claim grassroots authenticity in their local community and do not have the scale of the giants.

But in the meanwhile, let’s go to the local pub and make bets on the outcome of AB InBev’s next move, around a few beers…

How can two world-renowned business leaders commit first-time-beginner mistakes ?

Told you so …

Some critics, journalists and experts from all walks of life relish in pointing out how accurately they had predicted a business failure many months before it occurred.  One year exactly after Publicis and Omnicom announced their plan to merge, I don’t take much pride in having spelt out at the time what would happen to their phantasm of becoming the world’s largest marketing services company:  John Wren and Maurice Levy’s proposed scheme contained all the misconceptions and glaring mistakes one can possibly make in a merger or acquisition.  A real beginners’ job.  It is actually quite shocking to see two internationally respected businessmen totally ignoring some of the basic rules they could have found in the introduction of “Mergers and Acquisitions for Dummies”, which is easily available from Amazon alongside my own “Perfect M&As – The Art of Business Integration”.

Visualising the end game

Before and After : Publicis's Maurice Levy, all smiles as the merger project was announced.
Before and After : Publicis’s Maurice Levy, all smiles as the merger project was announced.

The Publicis-Omnicom proposed deal did not rest on a compelling business case, and in the absence of a clear and credible statement of the benefits the merger will

provide, one cannot expect to have the drive and motivation to overcome the many hurdles and challenges that need to be resolved as two organisations blend to become one.  Who is the individual that will set the tone? What will the resulting merged company look and feel like considering the two companies each have a strong but very different culture?   How well will Wren and Levy agree on key decisions?  The answer to this last point became blatantly obvious: not being able to agree on the nomination of the CFO is just so basic one struggles to understand how Messrs Wren and Levy allowed themselves to reveal with such enthusiasm and optimism a plan for which the first elementary steps had not even been thought through.

By Omnicom’s chief executive’s own admission : “There was no clear finish line in sight”.  How is it conceivable that such senior and supposedly experienced business leaders could ignore the most basic prerequisites of a successful business integration?

Preparation, preparation, preparation

Maurice Levy has to recognize the glaring shortfalls of the Publicis - Omnicom merger plan
Maurice Levy has to recognize the glaring shortfalls of the Publicis – Omnicom merger plan

It will take a good autopsy of this failed merger to reveal how much (or how little) advice the two companies had requested and received and considered prior to announcing their merger plan to the world.  Was there really that little due diligence prior to the announcement, or did the two businessmen simply ignore any warning signs they might have been given? Were they blinded by the prospect and thrill of becoming the world’s number one agency, bigger, better and bolder than Sir Martin Sorrell’s WPP? When Publicis and Omnicom announced their intention to merge, my article referred to “The obsession with size”.  Was this finally just about two over-inflated egos, or was there truly a cogent business rationale which failed to materialise?

How is it that nobody had anticipated that tax considerations would invalidate the complex structure on which the proposed combined company was due to be set-up?  Last year, in writing “shareholders vote by raising their hand, but clients can vote with their feet”,  I was wondering how forcing fierce global rivals such as Coca-Cola/Pepsi, Nestlé/Mars or Microsoft/Google to deal with one combined agency would not run into regulatory problems or result in some of those key clients seeking other options.  Now it transpires that amidst the difficulties to keep the merger on track, talent and client retention also became a big challenge: is that at all surprising?

Maintaining focus

Any book or “how to” manual on M&A will tell you that one of the big challenges during the merger process is to manage the dual focus of keeping day-to-day business on track whilst maintaining the integration drive.  Publicis already had a few problems of its own to resolve prior to the merger announcement, and attempting a complex merger in that state is like covering rust with glossy paint that will not take long to peel off.  In the absence of clear succession plans in Publicis Maurice Levy had already postponed his retirement before the merger proposal was on his radar screen, so by what miracle would the key pieces of the puzzle all fall beautifully into place in a combined Publicis-Omnicom organisation if Publicis could not figure out how to organise itself as a stand-alone entity?

Predictably, the uncertainty and lack of unity of vision that rapidly emerged after the merger announcement proved a huge distraction to the business.  Now the engagement is over, and the bruised fiancée is licking her wounds.  Publicis’s shares have dropped 16% since the beginning of the year, wiping off EUR 1.8 billion of the company’s value, with a drop in net income and further margin erosion,  whilst Omnicom announces a healthy rise in revenue.

After such a poor performance, Maurice Levy had better return to his desk and thrash out a coherent succession plan to restore clarity within Publicis, as many shareholders will feel he has reached the end of his shelf-life.


Two European giants with global reach

Holcim and Lafarge, confident of making the (b)right choice in cementing their future together
Holcim and Lafarge, confident of making the (b)right choice in cementing their future

For a change, this month’s mega-merger announcement does not involve American or Asian heavyweight players, but rather two giants in “old Europe”.  It is not about social media, high-tech or software, and will instead rock an industry which has none of that glitz and glamour  : cement.

Having flirted together but failed to reach a deal 18 months ago, the world’s two biggest cement producers (by value) are set to blend, in what is described as a merger of equals (after all, cement is cement …) as Holcim intends to acquire Lafarge and become a global giant with an annual turnover of 32 billion Euros.

A feast for the anti-trust regulators

Once combined, Holcim and Lafarge would have operations in 90 countries.  This would not be the first time an industry’s two largest players are allowed to merge after letting go of some assets, as did Guinness and GrandMet in 1997 to form Diageo, but the approval of that merger required some seven months of deliberations by regulators across the world.

Holcim and Lafarge expect to be under scrutiny in at least 15 countries.  This is unlikely to be a casual routinely exercise, because the cement industry has a long history of collusion and price fixing, acting as a cartel in many countries, and both Holcim and Lafarge are among the cement producers being probed under an investigation launched by the European Commission in 2010 which is still open.  In that context, important concessions will need to be made to the regulators if the deal wants to have the remotest chance of closing by the beginning of 2015 as Holcim and Lafarge predicted in their announcement.

Those sacrifices are already part of the merger scenario; a Lafarge spokesperson confirmed that up to 15% of the new group’s assets might be divested to secure the anti-trust authorities approval of the deal.   Two-thirds of those disposals are likely to occur in Western Europe where the overlap between the two merging companies is the most significant.  Compared to shutting down plants, selling production plants to competitors avoids massive lay-offs and also reinforces competition on the market: this is evidently something that will be perceived as positive by European authorities.

However, Western Europe is the area where cement over-capacity is at its worst and the market’s growth prospects are dull.  In that context, the pair’s disposals might only fetch a very low price, and if that divestment programme does not generate the projected 5 billion Euros, the business case of the merger could be quite seriously affected.

An ambitious business case

Some of the rationale for the Holcim-Lafarge merger makes eminent sense, but other components of the business case will require a real tour de force to be achieved.  The merger announcement failed to cause much excitement on the markets, even though the share price rise both Holcim and Larfarge have experienced – oscillating mostly between 5 and 12% – reveals a degree of interest from investors.

Holcim-1Cement is bulky, heavy and of low value relative to its weight. The market catchment area for any given production plant is therefore quite limited as transport costs rapidly outweigh economies of scale.  The positive side of this is that cement is one sector in which mature economies are not likely to be invaded by Chinese production, even if China now accounts for more than half of the world’s cement consumption.  A producer’s geographical spread is therefore a key factor.  In that sense, Holcim and Lafarge complement each other particularly well in the fast growing economies, as the former is strong in Latin America and Asia whilst the latter is well positioned in Africa and the Middle East.  The pair believe that the lower risk and business fluctuations resulting from better geographical spread will reduce their borrowing costs, thereby generating annual savings of some 200 million Euros.

Holcim and Lafarge believe they can save an annual 1.4 billion Euros three years after merging, which together with to the above-mentioned saving in financing costs would include 340 million on procurement and 250 million on sales costs, to mention just the key savings areas.  If they can manage that it will be quite a remarkable achievement considering their heavy involvement in France and Germany, two notoriously inflexible labour markets in which change can be slow and costly to implement.

Does the “value magic” reside in transforming the industry?

Beyond the promise of operational and financing savings, two components of the rationale for the Holcim-Lafarge merger are quite hypothetical at this stage but are potentially the most significant generators of economic value in the longer term.

Firstly, it takes a real mammoth to fight the growing competition in some of the world’s rapidly growing markets, such as China where Anhui Conch became the world’s largest cement maker last year (by volume, not by value), or Mexico’s Cemex, currently the world’s Nr 6 but growing on the fast lane to overtake its rivals.

Secondly, and this is the more exciting aspect of the merger, the pair’s combined marketing nous and R&D capability has the potential to revolutionise the market with the launch of innovative products which would transform the image of the industry, until now only too similar to the physical attributes of the product : rigid, grey and dusty …  Maybe cement can really be more than cement: Lafarge in particular has developed products whose improved specifications justify higher pricing and elevate cement above its current commodity status, such as fast drying cement or even cement which can set under water.  Variations in tone, texture and appearance are also on the cards, and with this comes the potential  – and the expectation as far as Holcim and Lafarge are concerned –  to play an active role in the evolution of architectural design and advise architects in their choices of these innovative materials.

Lafarges-Roberta-Plant-Calera-UsaConceptually and intellectually, this is quite an appealing and exciting challenge, but it is difficult to imagine such transformation within the next three to five years in two companies which until now have relied mostly on size and hegemony (and some times price-fixing when the going became too tough) rather than being agile and capable of re-inventing themselves by adding a service veneer over their heavy industry core.

Another fascinating business case commences for future business school students.  Let’s watch the next moves and allow three to five years before the jury delivers its verdict. We may be in for a good surprise.

All the fun without the burden of commitment

Reckitt Benckiser, owners since 2010 of the famous Durex® condom brand it acquired from SSL which played a major role in enabling the sexual revolution in the 60’s and 70’s, announced this month it was to acquire the rights to the K-Y® brand of lubricants from Johnson & Johnson.  The obvious affinity between these leading condom and lubricant brands is thus soon to be sealed in a commercial union.

"The Small Family Car", a cheeky advertising caption which caught the public's attention in the late 1970's and formed the base for Durex's sponsorship of Formula 1 racing ever since
“The Small Family Car”, a cheeky advertising caption which caught the public’s attention in the late 1970’s and formed the base for Durex’s sponsorship of Formula 1 racing ever since

This acquisition does not include any of the assets or staff of the current manufacturer, Johnson & Johnson owned McNeil-PPC, as that company will continue to supply the K-Y branded products to Reckitt Benckiser under the terms of that deal, which is due to complete by mid-2014. No complicated transfer of assets, no guarantees regarding future employment levels.  Doesn’t this just sound  so Durex®:  all the fun and benefit without any risk of being burdened with potential commitments…

A condom manufacturer not averse to cross-fertilisation

K-Y® is big business, generating worldwide sales exceeding USD 100 million in 2013, with the USA, Canada and Brazil being its key markets accounting for 70% of total turnover.  At age 97, this is undoubtedly a very vigorous brand, which experienced a quantum leap in 1980 when the formerly prescribed product was given the right to be sold over the counter. It has enjoyed a healthy performance ever since.

Durex®, with its 30% share of the global branded condom market, is evidently a key player; bringing these two leaders together obviously creates, as announced by Reckitt Benckiser, a unique portfolio of brands in the sexual wellbeing category, particularly in North America and Brazil where the Durex® brand will be able to piggy-back K-Y®  (no pun intended).

Whilst it is too soon to say whether K-Y® lubricants are set to replace Durex Play®, it is easy to imagine the launch of K-Y® condoms building on the strength of that brand in the Americas, and the Durex® brand appearing on K-Y® products in Europe and Asia.

The future of intimate lubricants on a slippery path?

About a decade after the first concerns were expressed regarding the safety of intimate lubricants and potential side-effects resulting from their use, Reckitt Benckiser’s acquisition coincides with a resurgence of those concerns prompted by statistics showing that human infertility has reached all-time record levels.

The Love Machine, as envisioned by Johnson & Johson: running smoothly with a little help from K-Y Jelly
The Love Machine, as envisioned by Johnson & Johson: running smoothly with a little help from K-Y Jelly

One of the key worries is that most intimate lubricants are acidic, with a pH ranging from 7.0 to as low as 3.5; that is well below the 7.0 to 8.5 range which the World Health Organisation deems to be most favourable for the survival and mobility of human semen.  Some condom users will greet this as good news, as the use of these acidic lubricants further reduces the risk of an unwanted pregnancy. On the other hand, market data suggests that couples who are seeking to procreate account for a high proportion of lubricant consumption, as these are used to compensate a natural insufficiency, the latter being the consequence of age as people tend to have their children later in life, as well as everyday stress which is worsened by the anxiety that follows repeated failed attempts to conceive.

More worrying, regardless of whether a couple is seeking to conceive, or wishing to avoid an unwanted pregnancy, or simply uses lubricants as an enhancer, it appears that the majority of intimate lubricants contain a range of irritant or unhealthy ingredients which can easily transfer to the bloodstream through the mucous membrane faster than they would upon contact with outer skin or through oral ingestion (source: The Ecologist, Oct 2007).  Interestingly, very few lubricant manufacturers bother to list the product’s ingredients on the packaging, so consumers concerned about those undesirable substances and their side-effects will find it difficult to make informed choices.  On the flip side, some brands of intimate lubricants do not contain any of those nasty substances; those brands are beginning to make a point about it in their advertising claims. This is likely to give further prominence to the issue and raise the general public’s awareness.

In an era in which consumers are increasingly inquisitive about the additives hidden in the food they ingest, it would make sense to give some further attention to the substances which are absorbed through other sensitive parts of the body.  There may come a day when legislation will force manufacturers to disclose what lies in the bottle, from mucous irritants such as glycerine and sodium benzoate, to oestrogen mimicking parabens, cell wall disrupters such as glycols, or the use of mineral oils.

After tobacco and alcohol, if health warning labels begin to appear on condoms and intimate lubricants, consumers will be left to wonder whether there are any pleasures left in this world that pose a serious threat to life!

Opportunity to be seized

There are two sides to every coin.  The Durex® brand name, which has evolved over the decades from being a contraceptive to becoming synonymous with safer sex, could actually make good use of those solid credentials by lending its name and image to an all natural K-Y® lubricant, the truly safe option.  This would, in addition to the improved routes to market provided to Durex® by K-Y®’s omnipresence in North America and Brazil, pave the way to larger profitable sales of intimate lubricants in the increasingly health- and ecology-conscious markets of northern Europe.

These are still early days, so let us wait for Reckitt Benckiser’s deal to complete this summer and for the new owner of the K-Y® brand to reveal its plans for the alliance between the Durex® and K-Y® brands, because that’s when the rubber hits the road.