Icahn Stake Loses Value as Clorox Success Returns Cash: Real M&A

Billionaire Investor Carl Icahn
Carl Icahn, billionaire investor and chairman of Icahn Enterprises LP. Photographer: Rick Maiman/Bloomberg

Billionaire Carl Icahn’s investment in Clorox Co. gives him a stake in a company that is already squeezing more profit from sales and generating more cash than any U.S. household products maker. That may make it harder for the activist to push for a sale or breakup.

Clorox, which makes everything from its namesake bleach to Hidden Valley ranch salad dressing and Kingsford charcoal, earned about 20 cents before interest and taxes for every dollar of sales in the past year, more than any U.S. competitor that has also boosted cash from operations for three years, according to data compiled by Bloomberg. Clorox’s shares have gained less than 1 percent on Icahn’s disclosure of a 9.1 percent stake last week after retreating 6.2 percent yesterday.

While Icahn made millions in the 1980s pressuring companies from USX Corp. to Texaco Inc. to split up or boost dividends and buybacks, Clorox has already returned 85 percent of its operating cash to shareholders since 1996, according to Sanford C. Bernstein & Co. A sale of the Oakland, California-based company would also be almost twice as large as the biggest ever acquisition in the household products industry, data compiled by Bloomberg show.

“It’s not like he’s saying that they’re doing the wrong thing,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “They’ve already been doing what he usually asks people to do. That is unusual. It suggests that he does think the company is undervalued.”

Susan Gordon, Icahn’s spokeswoman, said he was traveling and unavailable for comment.

Motorola, Lions Gate

Icahn, who turns 75 tomorrow, is loading up on Clorox after the shares of some of his most recent investments declined in value. Motorola Inc. and Lions Gate Entertainment Corp. are worth less than when his stakes in the companies were first disclosed, data compiled by Bloomberg show.

He initially revealed his stake in Motorola in January 2007 when it traded at about $75. Icahn pressured Motorola to use all its cash to repurchase shares and then called on the Schaumburg, Illinois-based company to separate its mobile-phone business. The stock fell 50 percent from his first investment through Jan. 3, the day before the spinoff was completed.

Shares of Santa Monica, California-based Lions Gate have fallen 30 percent since Icahn first reported a stake in May 2006. Icahn and the film studio’s directors have clashed over board seats, his failed takeover bid for the company and an ongoing lawsuit claiming he had “secret” arrangements to merge Lions Gate with Metro-Goldwyn-Mayer Inc.

BEA Systems, Oracle

BEA Systems Inc., after pressure from Icahn, sold to Redwood City, California-based Oracle Corp. at $19.38 a share in April 2008, representing about a 63 percent gain for shareholders since he first revealed a stake in the San Jose-based company eight months earlier.

Icahn bought 1 million shares of Clorox’s common stock at $66.35 apiece and options to purchase 11.5 million shares at $41 each because the company was undervalued based on its focus on “mega-trends,” a filing with the Securities and Exchange Commission said. Icahn may seek talks with management “from time to time” and supports Clorox’s plan to buy back as many as 11 million shares by the end of June.

The 12.5 million stake Icahn holds in Clorox is profitable above $63.48 a share, according to the filing and data compiled by Bloomberg. The stock, which rose as high as $72.43 following the disclosure, closed at $66.85 yesterday.

CDS Rise

The cost to protect debt issued by Clorox jumped after Icahn on Feb. 11 reported a stake equal to 9.08 percent. The credit default swaps climbed to 120 basis points yesterday, up from 95 basis points on Feb. 9. Credit swaps tend to rise when a company is deemed a buyout risk because the debt that may be added to its balance sheet to fund the takeover may erode its credit quality and lead to ratings downgrades.

The yield premium investors demand to hold Clorox’s $300 million of 3.55 percent bonds due 2015 rather than similar-maturity government bonds jumped 19 basis points to 93 basis points yesterday, according to Trace, the bond price-reporting system of the Financial Industry Regulatory Authority.

The notes, rated Baa1 at Moody’s Investors Service and an equivalent BBB+ at Standard & Poor’s, yield about 3.17 percent.

Clorox’s businesses, which include more than 50 products, are worth $71 a share, New York-based JPMorgan Chase & Co.’s John Faucher said in a report to clients yesterday. In a leveraged buyout, Clorox may fetch $70 to $72 a share, Faucher estimated.

‘Full Sale’

“It’s difficult to get a full sale of a company with as many disparate brands as they have,” said Jack Russo, an analyst at Edward Jones in St. Louis. Icahn will probably urge Clorox’s managers to sell certain brands, he said.

Dan Staublin, a spokesman for Clorox, declined to comment beyond the regulatory filing.

Clorox may be worth even less if split into separate units, according to Zurich-based UBS AG’s Nik Modi.

The company already squeezed about 19.8 cents of earnings before interest and taxes for every dollar of sales last year, according to data compiled by Bloomberg. That’s higher than an average Ebit margin of 16 percent for its closest rivals and more than any competitor that increased cash from operations for three consecutive years, the data show.

Energizer Batteries

Energizer Holdings Inc. of St. Louis, the maker of Energizer batteries and Schick shavers, had an Ebit margin of 16.4 percent, while Princeton, New Jersey-based Church & Dwight Co., which makes Arm & Hammer detergents and Trojan condoms, had a margin of 17.2 percent, data compiled by Bloomberg show.

Clorox has paid about 85 cents of every dollar of cash flow from operations to shareholders over the past 15 years and returned more cash to owners than any of its closest competitors in the past five years, including Cincinnati-based Procter & Gamble Co. and Colgate-Palmolive Co. of New York, according to Bernstein’s New York-based analyst Ali Dibadj.

“It’s a profitable company that’s now returning cash to shareholders,” said Connie Maneaty, an analyst with BMO Capital Markets in New York who rates the shares “market perform.” “It’s not as though he is stepping into something that is terribly run because Clorox is not terribly run.”

‘Extra Value’

Clorox would be the biggest acquisition of a household products company on record, according to data compiled by Bloomberg. A bid for Clorox would be almost twice as large as Newell Co.’s $6 billion purchase, including assumed debt, of Rubbermaid Inc. in 1999. Clorox, which said almost 90 percent of its brands are No. 1 or No. 2 by market share and are sold in more than 100 countries, has equity and net debt of $11.2 billion, data compiled by Bloomberg show.

Icahn “is a catalyst for getting a takeover bid,” the University of Chicago’s Kaplan said. “He’s investing in companies where he thinks there’s extra value, so that might be attractive to an acquirer.”

The company’s size may leave London- and Rotterdam-based Unilever NV, the world’s second-biggest consumer-goods maker, and P&G, the world’s largest consumer-products company, as the only buyers large enough to make a bid, according to Peter Sorrentino, who helps oversee $14.4 billion at Huntington Asset Advisors in Cincinnati, and owns Clorox shares.

‘Growing or Dying’

“Clorox would make sense for big players such as a Unilever or P&G,” he said. “It’s a matter of growing or dying.”

Elsewhere in mergers and acquisitions, Emergency Medical Services Corp., the largest U.S. operator of ambulance services and provider of emergency-room doctors, agreed to be acquired by New York-based private-equity firm Clayton Dubilier & Rice LLC in a leveraged buyout valued at about $3.2 billion, including net debt and transaction costs.

Stockholders of EMS will receive $64 a share in cash, the companies said in a statement yesterday. The shares retreated 11 percent as the purchase price was less than some investors projected. The Greenwood Village, Colorado-based company had surged 31 percent since Dec. 13, the day before EMS said it was looking at strategic alternatives.

General Electric Co. of Fairfield, Connecticut, agreed to buy the well-support division of Aberdeen, Scotland-based John Wood Group Plc for about $2.8 billion, adding equipment that helps extract more oil and gas from mature fields. The transaction may close later this year, with the approval of John Wood holders, GE said in a statement.

EchoStar Corp., the Englewood, Colorado-based provider of television set-top boxes and satellite services, agreed to buy Hughes Communications Inc. of Germantown, Maryland, for about $1.8 billion, including net debt.

There have been 2,877 deals announced globally in all industries this year, totaling $238.9 billion, a 14 percent increase from the $209.6 billion in the same period in 2010, according to data compiled by Bloomberg.


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