At Wal-Mart (WMT ), display racks overflowed with Schick's top-end razor, the Xtreme 3. Gillette's best (G ), the Mach3Turbo, was sold out--even though it cost an extra 49 cents. At Walgreens (WAG ), I found lots of Mach3Turbos, but for $8.99, three bucks over Schick's Xtreme 3 sale price. At a nearby Publix supermarket, same thing: Schick products brought less. A 7-Eleven (SE ) convenience store I checked had Gillettes and BICs on display but not one Schick.
What drew me the other day into the shaving market was neither razor burn nor a hot date, but a curious deal: Pfizer's (PFE ) $930 million sale of Schick-Wilkinson Sword to Energizer Holdings (ENR ). Since 2000, when Energizer was spun off by Ralston Purina, its business has been batteries, batteries, batteries, and a few flashlights. With Schick, its sales will diversify and leap by more than a third. But the deal also brings Energizer into closer combat with Gillette, a giant not just in shaving but in batteries with its Duracell unit. Is this one more boneheaded, big-is-better merger?
The answer, I think, is no. True, Gillette is so well-capitalized, with free cash flow last year of $1.7 billion, and Schick such a decided laggard--its line takes just 18%, vs. Gillette's 70%, of what analysts call the "wet shaving" market--that the deal's payoff is no sure thing. Just the same, considering Energizer's plans along with its stock market valuation, the merged company strikes me as a good bet.
Founded in 1921, bought by Warner-Lambert in 1970 and by Pfizer in its 2000 merger with Warner, Schick hasn't had a parent's close attention for years. Energizer CEO J. Patrick Mulcahy calls Schick an "orphan," one that Pfizer only began reinvesting in over the past year or two. In 2002, Schick generated an operating profit of about $74 million on sales of $650 million, a margin of 11%. Gillette's blade and razor unit, by contrast, posted operating profit of $1.3 billion on sales of more than $3.4 billion, a margin of nearly 38%. The challenge for Energizer is to narrow that profitability gap, without blowing cash on fruitless new initiatives.
The plan? First, lower corporate overhead costs. Second, develop new products, an area where Pfizer had already renewed investment and, Mulcahy told analysts, won't require more spending as a percentage of sales. Third, spend somewhat more on marketing, while leaning on the strength of Energizer battery distribution in areas such as Asia, where Schick can use the help. Fourth, avoid delusions of grandeur. Will Energizer "go after Gillette and get in a knock-down, drag-out with them? Absolutely not," Mulcahy vows. Instead, Energizer would be glad to catch up a bit while allowing Gillette to remain the new product and price leader.
Managements always promise discipline; not all stick to the plan. The reason I suspect Energizer will stay on course is that it's already performing nicely as a strong No. 2 in batteries. At all the retailers I visited recently, Energizer batteries enjoyed at least as good display as Duracells, while commanding prices that were equivalent or higher. At Walgreens, for example, a four-pack of AA Energizer Max alkaline batteries went for $4.49, a dollar more than comparable Duracells. At 7-Eleven, Energizers were the only batteries for sale. All told, in 2002 Energizer's 18% operating margin easily outran Duracell's 12%.
To buy Schick, Energizer must borrow the money. That naturally adds to the risk. Just the same, one who has signaled it's a risk worth taking with his own money is Energizer's board chairman, William Stiritz. In the five trading days ended Feb. 4, he spent more than $17.5 million to pick up 708,300 shares at an average cost of $24.80, expanding his family's Energizer stake by 29%. The stock lately trades above $26. My guess is Stiritz expects it won't stop there.