By Jacob Wolinsky 

Unilever (UL) shocked many when it announced last night that the giant was buying the relative start up Dollar Shave Club for one billion. While some experts expressed confidence in the move others were concerned about the high valuation paid, others the Dollar Shave Club model and some both. As always, we present both sides and let our readers decide what they should think. Below is what the sell-side is saying followed by the press release from last night.

Jefferies

Unilever buys Dollar Shave, for a rumoured $1bn. In a surprise announcement, one day ahead of their Q2, Unilever have announced that they are buying Dollar Shave Club, the leading player in the subscription-based, direct-to-home, razors and blades segment in the US. Terms have not been disclosed by ULVR. However, according to Reuters they are paying $1bn in cash.
High growth, at a high price. Dollar Shave should generate revenues of $200m in 2016 according to ULVR, 32% ahead of the prior year. For this they are paying a high price, at c.5x sales. By way of comparison, the recent Danone/WhiteWave transaction was at 3.2x sales. Deals in the US consumer space of this size at over 4x sales are rare.

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Our issue with this deal isn’t with the (expensive) terms. While we have been whingeing of late about the terms of the (cheaper) Danone/,WhiteWave transaction, the materiality and relativity of Dollar Shave to ULVR’s balance sheet is much less. What we are more concerned about are the potential ramifications for the broader competitive equilibrium in Global HPC. Over the past five years, ULVR have made hay in spaces like China Laundry and Brazil Haircare at the expense of a relatively supine and introspective P&G. But arguably this has been ‘part of the game’ for both companies. Now ULVR are parking their tanks on P&G’s lawn in one of their most profitable categories. This risks retaliatory and potential value-destructive retaliation, not just in Shave, but in other categories and spaces worldwide. So ULVR’s $1bn Shave Club might come with an even bigger ultimate price attached.

JPMorgan

Unilever’s acquisition of Dollar Shave Club (DSC) marks the company’s entry into shaving. The strategic rationale is twofold: 1) to provide a complementary category and lifestyle brand to bulk up its Male Grooming business, and 2) accelerate its business in e-commerce with a direct-to-consumer model which allows it to understand the consumer with data insights. DSC derived US$152m in sales in 2015 (predominantly in the US with small businesses in Canada and Australia) and ‘on track to exceed’ $200m in 2016 as per Unilever. While Unilever didn’t disclose the terms of the deal, Wall Street Journal1 reported cash payment of US$1bn for DSC which ‘isn’t profitable’. We have argued in the past (please see our note on Edgewell Personal Care here) that Unilever would benefit from a male shaving asset by driving high top-line synergies within the Male Grooming category. Yet securing such top line opportunities will require further investments and as such we would not expect the asset to turn profitable in the short term.

Glodman Sachs

Incumbents are experimenting more with DTC… Having launched Gillette Club in response to Dollar Shave’s growth, Procter is also experimenting DTC in Laundry. Tide Wash Club is an online subscription service for its Tide Pods with free shipping at regular intervals (similar to Amazon’s (AMZN) Subscribe & Save service). L’Oréal says that 5% of sales are now online and half of these are DTC.
… but we have concerns around profit contribution…
We estimate DTC is profit accretive for manufacturers for products sold between US$14 and US$28. Dollar Shave does not disclose profitability but very few of its products retail for more than US$14 and we note that other early stage subscription models (e.g. HelloFresh) tend to be loss-making owing to high costs of marketing. In light of this, we are not confident that Dollar Shave will be profit/returns accretive for Unilever in the near term.

Full release below

LONDON & ROTTERDAM, Netherlands–(BUSINESS WIRE)–Wednesday July 20, 2016 – Unilever today announced that it has signed an agreement to purchase Dollar Shave Club®. Founded in 2012 and headquartered in Venice, California, Dollar Shave Club (DSC) has grown into a full male grooming business that has transformed the shaving category with its lifestyle brand empowering 3.2 million members. In 2015, DSC had turnover of US$152 million and is on track to exceed US$200 million in turnover in 2016. Terms of the transaction were not disclosed.

“Dollar Shave Club is an innovative and disruptive male grooming brand with incredibly deep connections to its diverse and highly engaged consumers”

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With a product and brand range that extends far beyond shaving to include Wanderer® men’s personal wash products, Big Cloud® men’s skin care products, Boogies® hair styling products, and One Wipe Charlies® daily wipes, Dollar Shave Club® brings to Unilever’s personal care category a unique male grooming perspective.

“Dollar Shave Club is an innovative and disruptive male grooming brand with incredibly deep connections to its diverse and highly engaged consumers,” said Kees Kruythoff, President of Unilever North America. “In addition to its unique consumer and data insights, Dollar Shave Club is the category leader in its direct-to-consumer space. We plan to leverage the global strength of Unilever to support Dollar Shave Club in achieving its full potential in terms of offering and reach.”

Michael Dubin, founder and CEO of Dollar Shave Club, added: “DSC couldn’t be happier to have the world’s most innovative and progressive consumer-product company in our corner. We have long admired Unilever’s purpose-driven business leadership and its category expertise is unmatched. We are excited to be part of the family.”

Michael Dubin will continue to serve as CEO of DSC.

Subject to regulatory approval, the transaction is expected to close during the third quarter.

About Unilever:

Unilever is one of the world’s leading suppliers of Food, Home and Personal Care products with sales in over 190 countries and reaching 2 billion consumers a day. It has 169,000 employees and generated sales of €53.3 billion in 2015. Over half (58%) of the company’s footprint is in developing and emerging markets. Unilever has more than 400 brands found in homes around the world, including Persil, Dove, Knorr, Domestos, Hellmann’s, Lipton, Wall’s, PG Tips, Ben & Jerry’s, Marmite, Magnum and Lynx.

Unilever’s Sustainable Living Plan commits to:

• Helping more than a billion people take action to improve their health and well-being by 2020.
• Halving the environmental impact of our products by 2030.
• Enhancing the livelihoods of millions of people by 2020.

Unilever was ranked number one in its sector in the 2015 Dow Jones Sustainability Index. In the FTSE4Good Index, it achieved the highest environmental score of 5. It led the list of Global Corporate Sustainability Leaders in the 2016 GlobeScan/SustainAbility annual survey for the sixth year running. Unilever was ranked the most sustainable food and beverage company in Oxfam’s Behind the Brands Scorecard in 2016 for the second year.