With consumers willing to pay a 20% premium on eco-friendly products, big companies like Unilever (UL) are now looking to acquire smaller, sustainable brands rather than lose market share to rivals. The Anglo-Dutch consumer packaged goods giant's recent acquisition of Seventh Generation, a Vermont-based provider of eco-friendly household products (for a reported sum of between $600 million and $700 million, according to Fortune magazine) coupled with its interest in Jessica Alba's consumer products startup Honest Co., a maker of disposable baby diapers, natural household cleaners, and personal-care and beauty products, is ample proof of Unilever's desire to to aggressively bolster its position in this high-growth space.
Why the sudden upsurge of interest in sustainability? Up until recently, this niche was largely ignored by big consumer companies. Many CEOs were either unwilling or afraid to take a risk as innovation often requires a large investment of capital, said William Harrison, head of consumer investment banking at Headwaters MB. (See also, The 10 Fastest Growing Green Startups in 2016.)
But the massive growth in this industry has caused these big companies to take notice. According to Headwaters MB, sustainability has an estimated U.S. market size of approximately $290 billion. This includes the categories of personal health, green building, eco-tourism and natural lifestyles.
Now companies like Unilever are trying to play catch up. This year so far almost 7% of companies that specialize in churning out eco-friendly products have been takeover targets, a less than 5% increase from only a year ago, Headwaters MB told Bloomberg News.
"The big consumer companies now outsource their innovation to entrepreneurs," said William Harrison, head of consumer banking at Headwaters MB. "They will overpay for a company albeit small once there's a proven demand for consumer acceptance. They know they have to be in this space and they know they can't do it themselves so they'll wait for when a company can scale and it provides demand."
The end result can be a win-win situation for both the acquirer and the takeover target. In Seventh Generation’s case, the deal with a larger global company “can create value at an accelerated rate,” Jeffrey Hollender, co-founder of Seventh Generation, told Bloomberg News.
It is also a great opportunity for Generation Investment Management LLP, co-founded by Al Gore and which first invested $30 million in Seventh Generation two years ago, to rake in serious coin.
And, if Unilever is able to ink out a $1 billion deal to acquire Honest Co, it could strengthen Unilever’s footprint in the sustainability sector as well as reap handsome financial rewards for Honest Co and its backers, which include venture capital firms Institutional Venture Partners, Lightspeed Venture Partners and Pritzker Group Venture Capital, according to Crunchbase data. (See also, Unilever Eyes Honest; Is $1 Billion Bid Too Much?)
The interest doesn't seem to be fading anytime soon nor does it seem to be U.S.-centric, said Harrison. To prove his point, he noted that he's currently working with two international clients looking to acquire sustainable products manufactured in this country "because there's global cachet on healthy living products made in the U.S."