The New Shine on Alberto-Culver


With the acquisitions of Clairol in 2001 and Wella last year, Procter & Gamble (PG) gave notice it wants to usurp L'Oreal as the global leader in hair-care products. Clairol gave the Cincinnati-based consumer-product giant a colorant business, second only to its stylish French rival. Wella offered a big foothold in the highly profitable salon arena, another place where L'Oreal rules. Now, P&G's push could be blunted if L'Oreal acquires Alberto-Culver (ACV).

L'Oreal, according to a person close to the company, has made overtures to Culver, based in Melrose, Ill. Neither company will comment. Culver, in addition to making its own hair-care products, operates the nation's biggest distribution business to hair salons, through which L'Oreal, P&G, and others sell to professionals. Owning that business would give L'Oreal a greater grip on the $2.9 billion U.S. professional market, the world's largest. "It would certainly put a fly in the ointment of Procter's strategy," says Banc of America Securities analyst William Steele.

"ATTRACTIVE TARGET." That would hardly please P&G CEO A.G. Lafely, whose outfit spent $11 billion to buy Clairol and Wella. P&G has yet to prove it can expand Clairol's colorant business, where it seems to be outgunned by L'Oreal. And though P&G gained majority control of Wella, it's involved in a legal dispute with preferred shareholders who didn't accept the initial offer. Should they succeed, P&G might have to pay a higher price for complete ownership.

Culver's cheap valuation makes it an attractive target, analysts say. Though it has posted faster earnings growth than the personal-care industry overall, its stock -- at $41.99 a share as of Mar. 1 -- trades at a price-earnings multiple below the group, at 20 times forward earnings vs. 22. One reason is that prospects for its hair-care products, led by its Alberto V05 brand, are under increasing pressure from much larger rivals. It's hardly a big player on that front: Those sales account for just a third of its $2.9 billion in overall revenue last fiscal year.

The professional-distribution business is Culver's crown jewel and accounts for two-thirds of sales. It consists of 2,000 U.S. Sally Beauty Supply stores, which sell to both professionals and the public. It also includes Beauty Systems Group, which distributes higher-end products from many manufacturers directly to salons, and it operates 650 stores that sell only to professionals. Beauty Systems is by far the largest nationwide distributor, with 1,225 salespeople. Sally and Beauty Systems undoubtedly account for the majority of P&G's and L'Oreal's U.S. professional sales, rival manufacturers and distributors say.

MONOPOLY MONEY? Through the acquisition, L'Oreal could use Culver to replicate in the U.S. the distribution system L'Oreal has in Europe. Not only would its products get more priority through Beauty Systems but it could better place its goods within Sally, says Andrew Biazis, president of professional product maker Goldwell International. Like many manufacturers, he expects L'Oreal to make a bid, saying: "It would be like owning the last avenue in Monopoly."

P&G might be left with the uncomfortable options of continuing to stay within Beauty Systems, patching together a network of smaller distributors, or developing its own distribution system from scratch, Biazis adds. It would have little choice with Sally, he and others say, because no chain can match its size. "How else are they going to replace those sales?" asks Luke Jacobellis, chief operating officer at manufacturer John Paul Mitchell Systems.

The acquisition would certainly boost L'Oreal's substantial lead over P&G in the U.S. professional market. It has more than double P&G's hair-care business, with 2003 sales of663 million, according to Plano (Tex.)-based consultant Cirus Bulsara. While far smaller than retail sales, professional sales are far more profitable, lead the way in trends and technology, and build cachet for the companies' overall hair-care businesses.

FAMILY VALUES. With so much at stake, it's likely that P&G will jump into the fray should L'Oreal make an offer, predicts Lehman Brothers analyst Ann Gillin. P&G officials decline comment. Both companies' balance sheets could support the offers, which Gillin estimates would run between $4.2 billion and $4.8 billion, including Culver's debt. Culver has a market capitalization of $3.7 billion.

Once adamant about remaining independent under patriarch and Chairman Leonard Lavin, Culver now appears more open to a sale under the leadership of son-in-law and CEO Howard Bernick. He declined comment for this story. But in an interview with BusinessWeek last fall, he revealed that Culver has received"inquiries from time to time" and that: "If somebody comes along with a price that's the right price, as a shareholder I'm going to be an advocate of it" (see BW, 10/10/03, "Family, Inc.").

Bernick has taken steps that make Culver look less a family fiefdom -- and more attractive to a suitor. Last October, Culver eliminated a class of super-voting shares, reducing family control to 19% from 26%. The family has since cut its stake to 16% by selling shares. While Culver maintains that eliminating the dual class was aimed at boosting trading, itmakes the mechanics of an acquisition "much easier," says Larry Brottman, a portfolio manager at Chicago-based Mid-Continent Capital, which holds 259,000 Culver shares.

What seems more and more likely is that Culver is too important to remain independent much longer. By Robert Berner in Chicago


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