Love him or hate him, Carl Icahn makes the world a more interesting place. Who else but Icahn would launch a multi-billion dollar bid for a company he likes while hoping that the bid ultimately fails? And yet, that is what is happening now with Clorox (NYSE:CLX), as Icahn apparently hopes to stimulate a superior bid from a larger consumer goods company.
TUTORIAL: The Greatest Investors: Carl Icahn
The Deal That May Be
Icahn (through Icahn Enterprises) has stepped up with a bid of $76.50 per share for the rest of Clorox (Icahn owns a little more than 9% of Clorox shares). That is a 12% premium to a stock that has been a pretty notable laggard versus the S&P 500 over the past two years (though an outperformer on the five year comparison).
If Clorox were to take this $10.2 billion deal, it would be at a valuation of about 10.6x trailing EBTIDA and less than two times forward sales - valuations that would still be below comparables like Procter & Gamble (NYSE:PG) and Colgate Palmolive (NYSE:CL).
A Deal He Doesn't Actually Want?
While many acquisition proposals talk of synergies and a bright future as a combined entity, Icahn's proposal actually reads as though Icahn doesn't want the deal to go through. Instead, Icahn hopes this will spur the company and potential suitors to start talking, with an eye toward arriving at a deal price even higher than his offering. Icahn went so far as to suggest a $100 per share price would be appropriate, and estimated that companies like P&G, Colgate, Kimberly Clark (NYSE:KMB), Unilever (NYSE:UL) and Reckitt Benckiser (OTC:RBGPY) could still see meaningful earnings accretion at that price.
Unlike some of the badgering that other activist investors engage in, Icahn has put money behind his mouth. Not only has he arranged financing with Jefferies (NYSE:JEF) to see the bid through, he has proposed a $100 million break-up fee as well.
How Realistic Is Icahn?
Icahn's proposal has a certain rationality to it. Companies like Procter & Gamble, Henkel and Colgate could get some synergies out of a Clorox deal. Even still, he may be overstating the value of Clorox and its bargaining position.
Clorox already runs a very tight ship with respect to expenses and that could cap some of the synergies from a deal, though facility consolidations and cutting administrative overlap would still be relevant. The more problematic issue is that Clorox has few growth product categories and considerably lower emerging market exposure than many of its would-be buyers. Now, Icahn could argue that that is built-in growth potential (taking Clorox's products abroad through an existing distribution system), but it also argues against a buyer needing to pay a sizable premium. Moreover, a company like Church & Dwight (NYSE:CHD) could be an alternative deal option.
How Much Will This Help?
With Icahn's bid out there and apparently backed with financing, it is hard to see Clorox's stock slipping much below the $75 to $76 range in the short term. Clorox's management will probably reject the deal (unfriendly deals are not common in the consumer goods space), but Icahn is not famous for letting go easily. All the same, it seems aggressive to think that Clorox will get the $100 bid that Icahn apparently thinks it deserves.
With this stock now in play, the price does not look like a great bargain. Those who agree with Icahn's reasoning and see $100 as a fair price can certainly profit from here, but anybody buying on that basis should be prepared for the process to take some time and quite possibly never go much past Icahn's initial bid. (To learn more about Carl Icahn, see Carl Icahn's Investing Strategy)
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