RBC Discusses Takeovers in HPC Sector Amid 3G/Kraft Heinz's (KHC) Elephant Gun; Also Sees Pepsi (PEP) Takeover Over Coke (KO)

RBC Capital analyst Nik Modi weighed in on the Home and Personal Care (HPC) sector after 3G Capital and Berkshire Hathaway backed Kraft Heinz's (NYSE: KHC) $143 billion bid for Unilever (NYSE: UL), which has since been "amicably withdrawn". If the deal were consummated, Modi believes KHC would have merged KHC/Unilever-Food and spun-off Unilever-HPC, thereby creating a HPC platform for further cost cutting and M&A. They see two overarching effects on their coverage amid the news: 1) investors will seek to understand which HPC businesses are 3G's most likely targets (just as they have in the food space over the past 4 years); and 2) HPC management teams are likely to become even more
disciplined on the cost side.

Looking over their coverage, they view Edgewell Personal Care Company (NYSE: EPC) as the most likely takeout candidate as well as the name with the most cost cutting opportunity.

Meanwhile, they believe an acquisition of Colgate (NYSE: CL), Kimberly-Clark (NYSE: KMB), Clorox (NYSE: CLX) and Church & Dwight (NYSE: CHD) is a lower probability event. While CL and KMB are seen as most likely per the firm's conversations with investors they are less sure. Modi notes CL's EBIT margins of 26% are the highest in their HPC coverage and already near KHC's 29%. KMB's 19% EBIT margins are also
above the HPC average 17%, and an elevated level of competition is less compelling. CHD and CLX may also be considered, though they view this as likely less than even CL or KMB, as their brands/categories (such as cat litter and charcoal) may not easily be scaled abroad.

Looking at Coke (NYSE: KO) and Pepsi (NYSE: PEP), they believe PEP would be a more likely target of 3G/KHC than KO, citing: 1) KO's refranchising efforts create a "poison pill" for 3G given they would not be able to control the entire cost structure of the KO system -- thereby limiting their ability to cut costs for value creation. As a reminder, PepsiCo owns most of its bottling assets. 2) 3G's path to value creation would be much easier with PepsiCo (separate Frito-Lay and Pepsi Beverages, perhaps merging with KHC followed by further cost cuts at Pepsi Beverages and M&A).

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