Take Me to Church & Dwight
Merger in aisle five? Church & Dwight may be emerging as the industry's next deal candidate.
The $12 billion consumer-products company makes drug-store and supermarket staples ranging from Arm & Hammer baking soda to Oxi Clean stain remover and Trojan condoms -- all steady and dependable sellers, even if they're not major growth vehicles. That stability is partly why the company isn't much of a newsmaker and its stock isn't traded as frequently as better-known industry giants such as Procter & Gamble and Colgate. But stability is an appealing attribute at a time when businesses are complaining about growth and foreign-currency dilemmas, and as consumer-products companies are maneuvering to find the right product and geographic mix.
Church & Dwight is a U.S.-centric business with one of the most predictable profit streams in the industry. Like most big consumer staples companies, its days of double-digit growth have passed. But revenue is consistent and analysts don't see that changing:
It's bought smaller brands and scaled them up, such as Batiste dry shampoo, which had $25 million of revenue when Church & Dwight acquired it in 2011 and now brings in about $100 million. It's also tried to stretch the Arm & Hammer brand into as many products as possible.
For American companies, a recurring theme during the past year has been how the strong dollar is shaving earnings from their operations abroad. Because more than three-quarters of Church & Dwight's revenue is generated in the U.S., this hasn't been as large of a problem for it. And Church & Dwight has been extracting more operating profit from each dollar of sales than most of its rivals:
On the other hand, Church & Dwight itself is an acquirer, though its deals have tended to be small. The company's largest takeover was the $650 million it spent in 2012 on Avid Health, the maker of L'il Critters children's gummy vitamins and Vitafusion adult gummy vitamins. Since then, it's done a few much smaller transactions. There's been talk in the past about whether Clorox, the $16 billion cleaning-products maker known for its bleach, would be a good merger partner for Church & Dwight. 1
Given its new leadership and pristine balance sheet, the company is likely to do something larger now. Matt Farrell, who was promoted to CEO on Jan. 1, and Rick Dierker, who stepped into his role as chief financial officer, talked about this at the Consumer Analysts Group of New York conference in February. Dierker said Church & Dwight has the capacity to do a $2.8 billion deal while maintaining its credit rating (Baa1, according to Moody's). Net debt is less than the Ebitda it generated in the past 12 months.
"We don't want to go to that just with nickels and dimes. We want to think big. So we're looking for much bigger fish."
Dierker also made an important point about deal selection:
"The last thing you want to do is wind up with a grab bag of lots of small brands, because that's going to add a lot of complexity into the company."
Church & Dwight's slightly rich valuation can argue for it being either a buyer or seller. A meaningful acquisition would help justify the stock's price-earnings ratio of 26 (based on 2016 estimates), which compares with an average of about 23 for its North American and European peers. The flip side is that the best time to sell yourself is when your valuation is high.
In either case, don't be surprised if Church & Dwight soon appears on the deal radar.
There were also entertaining stories about these two in 2011, when Church & Dwight sued Clorox over its "Fresh Step" litter box commercials. Actual line from the official complaint: "Cats do not talk."
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