Bloomberg News

Icahn Betting Clorox Bids Exceed Buyers’ Valuations: Real M&A

September 02, 2011

Sept. 2 (Bloomberg) -- Carl Icahn is betting that companies from Procter & Gamble Co. to Colgate-Palmolive Co. and Unilever will pay a higher valuation for Clorox Co. than their own stocks are worth.

Billionaire investor Icahn, who’s campaigning for Clorox to put itself up for sale, said this week he would back up the process by offering to pay $78 a share if the Oakland, California-based company doesn’t find an acquirer. Icahn’s price tag values Clorox at 19.3 times profit, more than the earnings multiple of all six companies he has suggested as potential strategic buyers, according to data compiled by Bloomberg.

Even with a profit margin that’s higher than 95 percent of rival U.S. household products makers, it still may be difficult for Icahn to find a buyer willing to take on an entire company that produces everything from Glad trash bags to Hidden Valley Ranch dressing and Burt’s Bees lip balm, according to Harris Private Bank. After rallying to a record $74.55 on Icahn’s first takeover bid in July, Clorox shares yesterday traded 12 percent below his latest proposal, indicating investors aren’t convinced the company will be acquired.

“I don’t see too many buyers coming out of the woodwork for such an expensive stock,” Jack Ablin, chief investment officer for Chicago-based Harris Private Bank, which oversees $60 billion, said in a telephone interview. “It just seems somewhat prohibitive to a strategic buyer. I don’t think there’s a buyer that would want the whole thing.”

‘Back Stop’

Icahn, 75, said this week that if he succeeds in replacing Clorox’s board members, he will “back stop” an auction and acquire the company for $78 a share if there’s no higher offer. At least half of the buyout, which values the company’s equity at about $10.3 billion, would be in cash with the rest in senior unsecured debt.

The latest proposal is $2 less than his previous offer, which Jefferies & Co. had said it would help finance by raising $7.8 billion in debt. Icahn, Clorox’s largest investor with a 9.5 percent stake, raised his offer to $80 a share on July 20, after the company rejected his earlier bid of $76.50 and adopted a poison pill to guard against a takeover. The board also said the $80-a-share offer was “inadequate” and “not credible.”

“There was a lack of credibility before, and there’s even more so now,” Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in a telephone interview. “His latest offer seemed very flimsy.”

‘Highly Conditional’

In an Aug. 30 statement, Clorox’s board said it’s open to “any credible proposal” and again called Icahn’s offer “highly conditional.” Icahn is looking to fund half the purchase by borrowing from Clorox investors and didn’t provide any terms or conditions for the debt, Kathryn Caulfield, a spokeswoman for Clorox, said in an e-mail.

Icahn, who made millions in the 1980s pressuring companies from USX Corp. to Texaco Inc. to split up or increase dividends and buybacks, has succeeded in boosting Clorox shares.

Clorox reached a record high of $74.55 on July 15, the day Icahn’s original takeover proposal was made public. Even after falling 7.4 percent to $69.01 as of yesterday, the shares were 1.7 percent higher than the 20-day trading average before Icahn first disclosed a bid.

Shares of Clorox retreated 0.6 percent to $68.59 today in New York trading.

‘The Right Time’

“Now is the right time for Clorox to be aggressive in pursuing a strategic transaction,” Icahn said in a letter to Chief Executive Officer Donald Knauss, 60, on July 14. “There are potentially multiple substantially larger strategic bidders with robust balance sheets who are in a position to make a bid that reflects significant inherent synergies.”

The letter urged Clorox to seek offers from P&G, Unilever, Colgate-Palmolive, Reckitt Benckiser Group Plc, Kimberly-Clark Corp. or Henkel AG. Representatives for P&G, Unilever and Reckitt Benckiser said their companies don’t comment on deal speculation. Representatives for Colgate-Palmolive and Henkel didn’t return telephone and e-mail requests for comment.

Henkel has no interest in acquiring Clorox, CEO Kasper Rorsted said in an interview on Bloomberg Television last month.

Bob Brand, a spokesman for Kimberly-Clark, declined to comment beyond the company’s earnings call. Kimberly-Clark CEO Thomas Falk said on the July conference call that his plan “doesn’t call for big transformational M&A” and that Clorox is already a “well-managed company.”

$100 Price

The benefits of owning the whole company are “extremely compelling” and would help buyers pay down debt taken on to help fund a deal, Icahn said in a July 15 telephone interview. A bid of $100 a share for Clorox would still be justified as it would boost earnings per share for five of the respective strategic buyers by 5 percent to 26 percent, he estimated in the letter. Henkel wasn’t listed as a buyer that would receive a profit boost at $100 a share.

Icahn’s current offer of $78 a share would already value Clorox at 19.3 times profit of $4.05 a share in the last 12 months, a higher price-to-earnings multiple than all of the six suggested strategic buyers. They traded at an average ratio of 15.6 yesterday, data compiled by Bloomberg show. At $100 a share, Clorox would be valued at 24.7 times earnings.

“The multiple that we’re paying based on the company’s current earnings is higher than where some of these companies currently trade, but I believe that the reason they can pay a large premium is because they have cost synergies and revenue synergies,” Icahn said in a telephone interview yesterday.

P&G, Unilever

Colgate-Palmolive, the New York-based maker of Colgate toothpaste and Irish Spring soap, had the highest multiple, trading at 18.5 times profit. Cincinnati-based P&G, the world’s largest consumer-products company with brands from Gillette razors to Olay skin care, was valued at 16 times earnings, according to data compiled by Bloomberg.

Shares of Colgate-Palmolive slipped 1.5 percent to $88.52 today in New York. P&G fell 1.1 percent to $62.55.

Unilever, the London- and Rotterdam-based maker of Dove soap and Magnum ice cream, traded at 15.1 times profit in Amsterdam yesterday. Henkel of Dusseldorf, Germany, is the cheapest of Icahn’s suggested strategic buyers. The maker of industrial adhesives, Dial soap and Soft Scrub cleaners was valued at 14.4 times earnings.

Shares of Unilever slid 1.1 percent to 23.64 euros today in Amsterdam. Henkel lost 1.9 percent to 40.21 euros in Frankfurt.

‘Quite Expensive’

“Clorox’s stock is quite expensive, so a deal with many of those companies would be dilutive,” Ali Dibadj, a New York- based analyst for Sanford C. Bernstein & Co., said in a telephone interview. “You look at the strategic buyers who have been listed and we would be very surprised if any of them are chomping at the bit to pick up a Clorox.”

While certain areas such as Burt’s Bees, dressings and sauces are attractive, it may be difficult to break up the company because of tax issues, Dibadj said. Acquirers may also be deterred by Clorox’s dependence on the North American market, which accounted for about 79 percent of revenue last fiscal year, he said. Colgate-Palmolive gets only about 19 percent of sales from North America.

Net income fell 7.6 percent in the year ended June 2011 as commodity costs rose, particularly for resin that’s used to make plastic bags and bottles.

Still, Clorox’s profit margin of 10.65 percent in the last year was higher than all U.S. household product makers with market values greater than $100 million, except for Church & Dwight Co. with a 10.74 percent margin. The Princeton, New Jersey-based company makes Arm & Hammer baking soda.

‘He’s Probably Right’

“We didn’t need Mr. Icahn to broker a strategic deal,” said Russo with Edward Jones. “He feels if you add up all the separate parts, you’re going to get a number higher than where the stock price is trading today. He’s probably right, but in actuality, it’s tough to do.”

Icahn’s current bid, which is half debt, “doesn’t sound too appealing” to shareholders, Michael Liss, a Kansas City, Missouri-based fund manager at American Century Investments, said in a telephone interview. The firm oversees $109 billion, including about 1.9 million Clorox shares. The activist investor may be “making a lot of noise” to boost the shares and make a profit, Liss said.

“For all these companies, I don’t see them creating any value for their shareholders by buying Clorox,” Liss said. “They don’t need to mess around with buying Clorox. It won’t help the multiple of any of these companies.”

--With assistance from Michael Tsang and Lauren Coleman-Lochner in New York. Editors: Sarah Rabil, Daniel Hauck.

To contact the reporters on this story: Danielle Kucera in New York at dkucera6@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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