Icahn Can’t Claim Clorox Without Adding $600 Million: Real M&A

Icahn’s Push on Motorola Patents Adds $600 Million to Value
In February 2008, Carl Icahn and his affiliates reported that they had purchased 114.3 million shares of Motorola Inc. for $1.78 billion, or about $15.58 a share. Photographer: Chip East/Bloomberg

If Carl Icahn is serious about buying Clorox Co. in what would be his biggest takeover, the activist investor may be forced to come up with an additional half-billion dollars.

His sweetened $80-a-share offer for Clorox, which was rejected by its board this week as “inadequate,” values the company at 11.6 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Takeovers of household and cosmetic-products makers greater than $1 billion in the last five years were struck at a median of 12.2 times Ebitda, implying that Clorox’s equity may fetch $85 a share, the data show. That would cost Icahn an extra $600 million, excluding fees and expenses, to close the deal.

Icahn, 75, has yet to articulate a plan to boost returns at a company that’s already making more profit from sales than any other U.S. household products maker, data compiled by Bloomberg show. While Jefferies & Co. said it’s “highly confident” it can help Icahn raise $7.8 billion in debt, the total is almost three-quarters of the entire amount it arranged in the U.S. high-yield market last year and would be its biggest financing arrangement, the data show.

“There’s a level of disbelief that the offer is real, that if Icahn were totally serious we would get more details on the funding,” Timothy Ghriskey, Bedford Hills, New York-based chief investment officer at Solaris Group LLC, which manages $2 billion, said in a telephone interview. “The higher that Icahn goes and especially the more clarity he gives on the financing might convince people that he’s real here, and the board would have to give it more weight and consideration.”

Poison Pill

Kathryn Caulfield, a spokeswoman for Oakland, California-based Clorox, declined to comment. Susan Gordon, a spokeswoman for Icahn, said the investor wasn’t available for comment.

Icahn, Clorox’s largest investor with a 9.4 percent stake, raised his offer to $80 a share on July 20, after the company rejected his earlier bid of $76.50 a share and adopted a so-called poison pill to guard against a takeover. The current bid values the equity he doesn’t already own at $9.7 billion, plus $2.3 billion in net debt, data compiled by Bloomberg show. The raised bid represents an 18 percent premium to the 20-day trading average before the initial offer.

Clorox fell $1.10, or 1.5 percent, to $71.59 today, the lowest price since Icahn’s proposal was first disclosed.

‘Not Credible’

The proposal “substantially undervalues the company and is not credible,” Clorox’s board of directors said in a statement July 26, rejecting Icahn for a second time. It lacks detail and “a fully underwritten debt commitment and clearly identified and adequate equity capital” needed to complete the deal, Chairman and Chief Executive Officer Donald Knauss wrote in a letter to Icahn.

Clorox’s profit margin of 10.6 percent in the last 12 months was the highest among U.S. household products makers with market values greater than $500 million, according to data compiled by Bloomberg. The industry average was 6.4 percent.

“Management has done the best they can with all of its categories,” Ali Dibadj, a New York-based analyst at Sanford C. Bernstein & Co., said in a phone interview. “I’m not sure that a buyer would make it much better than what the current management has done.”

In May, Clorox cut the top end of its annual profit forecast and predicted 2012 earnings that fell short of analysts’ projections, citing higher commodity costs. Clorox said it increased the price of Glad trash bags 9.5 percent as the cost of resin, used to make plastic bags and bottles, rises. Higher resin prices will account for about 60 percent of total commodity cost increases of as much as $170 million this fiscal year, the company said on its May conference call.

Record High

“While this poor performance has lessened the prospects for Clorox shareholders on a standalone basis, our perspective is that the prospects for shareholders have never been greater in terms of a sale of the company,” Icahn, the chairman of Icahn Enterprises LP, said in his letter to the board.

Clorox reached a record high of $74.55 July 15, the day Icahn’s takeover proposal was made public. The shares closed at $72.69 yesterday, 9.1 percent below the current offer. They’re still 7.1 percent higher than the average price in the 20 days prior to Icahn’s first bid.

“Investors in Clorox still question the reasoning for Icahn to go after Clorox,” Bernstein’s Dibadj said. “The market isn’t responding positively to his bid. They’re not believing him.”

Historic Deals

In the last five years, the median multiple for takeovers of household products and cosmetic companies greater than $1 billion was 12.2 times Ebitda, data compiled by Bloomberg show. At that multiple, Clorox’s total equity would be valued at $11.4 billion, or $85.30 a share, based on Ebitda of $1.1 billion in the last 12 months, the data show.

The increase would cost him an additional $640 million.

“You would have to think that if he goes to the mid-$80s in an all-cash offer that it would be hard for the board to turn it down again,” Jack Russo, an analyst at Edward Jones in St. Louis, said in a phone interview. “Even if he would raise it to that, you’re still going to have questions about getting proper financing.”

Jefferies said it’s “highly confident” it can help Icahn raise $7.8 billion in debt to help fund the takeover, according to a letter dated July 14 disclosed in a regulatory filing.

Questions on Financing

“The market doesn’t believe because there are so many questions on the financing,” said Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which oversees $3.8 billion. “He needs to line up his financing, more than just a ‘highly confident’ letter from Jefferies.”

The New York-based bank arranged $4.4 billion of leveraged loans and $6.4 billion of high-yield bonds in the U.S. last year, according to data compiled by Bloomberg. The largest loan for which Jefferies has served as the administrative agent was a $385 million term loan for Sunquest Information Systems Inc. last year, according to data compiled by Bloomberg.

Last month, Jefferies, along with three other banks, arranged about $2.1 billion of financing for Alere Inc., data compiled by Bloomberg show.

“We do not give ‘Highly Confident Letters’ lightly,” said Tom Tarrant, a spokesman for Jefferies. “Over the years, we have arranged tens of billions of dollars in financings for our clients. Given the quality of the company’s assets, the level of equity Carl Icahn is committed to putting into this transaction, and the structure that he has proposed, we are, indeed, highly confident that Jefferies can arrange the financing for this transaction.”

Strategic Buyer

Standard & Poor’s said that adding $7.8 billion in debt could lead to Clorox’s BBB+ rating, the eighth-highest level of investment grade, being lowered into the ‘B’ category, which is at least four levels into junk.

Icahn has urged the board to “aggressively pursue” a deal with a strategic buyer, such as Procter & Gamble Co., Unilever NV, Colgate-Palmolive Co., Reckitt Benckiser Group Plc, Kimberly-Clark Corp. or Henkel AG.

While some of the companies may find certain Clorox’s brands attractive, they’re unlikely to buy the entire business because of its range of products, said Russo of Edward Jones. Clorox makes everything from Formula 409 kitchen cleaner to Hidden Valley Ranch salad dressing, its namesake bleach and Burt’s Bees lip balm.

Clorox gets about 80 percent of revenue in the U.S., while competitors are trying to boost sales in faster-growing emerging markets, said Rob Plaza, an analyst at the private-banking unit of KeyCorp in Cleveland, which oversees $22 billion.

‘He’s a Master’

With no other likely buyers, Clorox may be left to negotiate a higher bid from Icahn or face a proxy fight for board seats, Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., said in a phone interview. His firm oversees $4 billion.

Icahn made millions in the 1980s pressuring companies from USX Corp. to Texaco Inc. to split up or boost dividends and buybacks. If he’s successful in acquiring Clorox, he “might split it up and possibly keep one of the divisions,” he said in a July 20 interview with Bloomberg’s “Street Smart with Carol Massar and Matt Miller.”

“He’s a master at this,” McCormick said. Still, “you have a real chance that Icahn will be forced to put up more or go away,” he said.

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