Clorox Exits Venezuela After Price Freeze Hobbles Operations

Clorox CEO Don Knauss
“This is a very difficult situation for our company,” Clorox Co. Chairman and Chief Executive Officer Don Knauss said in the statement. Photographer: Peter Foley/Bloomberg

Clorox Co., the consumer-products company that sells everything from bleach to salad dressing, is pulling out of Venezuela after inflation and government-mandated price freezes made the business unprofitable.

Clorox Venezuela will cease operations immediately and try to sell its assets, according to a statement today. The shares rose the most since 2011 after the announcement and a weekend report by the New York Post that Clorox had spurned a takeover offer from another consumer-products company earlier this year.

“This is a very difficult situation for our company,” Chairman and Chief Executive Officer Don Knauss said in the statement. “We are extremely proud of the men and women who did their very best to operate our business in the face of significant economic challenges. We are working to support them through this transition.”

Clorox becomes the latest U.S. company to pull back from Venezuela, where currency controls, supply shortages and the world’s highest rate of inflation have stymied foreign investment. The turmoil has grown since the March 2013 death of President Hugo Chavez, who had run the country for 14 years.

The exit will bring costs this fiscal year of as much as $65 million, or 50 cents a share, the Oakland, California-based company said. Venezuela accounted for about 1.4 percent of its total revenue.

Clorox blamed triple-digit inflation and an almost three-year-long price freeze, which forced the company to sell products at a loss. While the government approved price increases this year, they weren’t high enough to let Clorox Venezuela break even, the company said.

Takeover Talk

The move could also help make Clorox a “cleaner” takeover target, said Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York. The announcement followed renewed speculation that the company could be acquired.

“What you’re getting with Clorox is a very well-run, slow-growth, domestic commoditized business,” he said. That could be fine for overseas companies seeking more U.S. exposure, though it wouldn’t make sense for a company such as Procter & Gamble Co. that already has a strong U.S. presence.

The shares jumped 7.4 percent to $97.23 at the close in New York, the biggest increase since July 2011. The stock was down 2.4 percent this year through the end of last week.

‘Logical Suitors’

The Post reported over the weekend that a rival consumer-products company approached Clorox about a deal, only to be rebuffed. While the newspaper didn’t name the company, it cited Church & Dwight Co., P&G, Jarden Corp. and Unilever Plc as “logical suitors.”

Chris Ferrara, a Wells Fargo & Co. analyst, tamped down that idea in a report, saying those companies don’t make much sense as potential buyers. Takeover talk may still help fuel the shares, though, even if there isn’t a high probability of a deal happening, he said.

Clorox also is transitioning to a new CEO, which would make it odd timing for a deal, Dibadj said. The company said on Sept. 18 that Benno Dorer, an executive in charge of Clorox’s laundry, home care and international businesses, will take the reins from Knauss in November.

Aileen Zerrudo, a spokeswomen for Clorox, declined to comment on the buyout speculation.

In the wake of Clorox’s departure from Venezuela, Procter & Gamble -- the world’s largest consumer-products company -- said it has no plans to follow suit.

“We remain committed to Venezuelan consumers and our business remains unchanged,” Paul Fox, a spokesman for the Cincinnati, Ohio-based company, said in an e-mail.

More Cushion

It’s hard to tell if other companies will follow Clorox’s example and leave Venezuela, said Connie Maneaty, an analyst at BMO Capital Markets Corp. in New York.

“Clorox did what was right for the company,” she said. More geographically diverse businesses “probably have a little bit more of a cushion, but anyone who operates there has been affected.”

Clorox Venezuela generated about $77 million in revenue in the past fiscal year, which ended June 30. The division’s losses before interest and taxes were about $23 million. The total cost of exiting the country and terminating contracts will amount to as much as $121 million, before taxes.

The company also reiterated its forecast for total continuing operations today, predicting flat sales and earnings of $4.35 to $4.50 a share this year.

Trapped Money

Currency controls also have made it difficult for U.S. companies to get money out of Venezuela. American Airlines Group Inc., which had $750 million trapped in the country as of March, responded by cutting flights to Venezuela by 79 percent earlier this year. United Continental Holdings Inc. and Delta Air Lines Inc. and more than a dozen other airlines also have trimmed capacity, sales or service in response to the currency regulations, which require government authorization to repatriate earnings from tickets sold in the country.

Exxon Mobil Corp. fled Venezuela after the government ordered it to surrender control of a massive oil project and accept a minority stake. The nationalization of the asset cost the company 425 million barrels of proved reserves, which had a market value of $38 billion at the time of the seizure. Exxon continues to pursue reimbursement through various international legal venues.

For Clorox, which gets about 80 percent of its sales from the U.S., Venezuela shows that expanding internationally isn’t always easy, said Jack Russo, an analyst at Edward Jones.

“There are many benefits in operating a business overseas -- there are risks too,” he said. “This case illustrates that.”

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