Carl Icahn is a very confident man, saying that he will acquire Clorox (CLX) for $78 per share if no other potential buyers place a higher bid. Currently trading around $69 per share at a to the minute P/E ratio of 17.18, this would make Clorox a pretty expensive acquisition when looking at how potential buyers like Procter & Gamble, Colgate Palmolive, and Unilver are currently trading. However, we are still in a bear market and disregarding Clorox’s value, now is a good time for these conglomerates to make purchase. Coupling this with the fact that there are very few companies with as many strong brands as Clorox’s brands, Icahn may not be completely crazy. The recent acquisition of Motorola Mobility by Google further shows how Icahn’s schemes can produce strong returns for investors that follow his lead. In this article, I talk about Clorox’s three largest potential acquirers, and the risks and opportunities that investors should consider if Clorox does get acquired.
I think that Colgate-Palmolive is a very likely acquirer for Clorox. With a $43.55 billion market cap, itcan grow its equity by over twenty percent. Their stock price would probably take about a 4 percent drop with the announcement of the acquisition, but that is a small price to pay for expansion is the mature consumer products industry. Currently about 22 percent of Colgate-Palmolive’s is Home Care products, so acquiring Clorox would about double its presence in home care and give C-P a lot more bargaining leverage against retailers. I believe that Colgate-Palmolive is the leading candidate to acquire Clorox if any bidding action arises. However, it is still uncertain if C-P will be willing to pay a premium for a company that already trades at multiples higher than most of its industry.
Unilever does not have a substantial market share in household products like Colgate-Palmolive and P&G have. Unilever’s main brands are foods and personal care brands. However, Unilever may be looking to get more into cleaning products judging by their acquisition of Colgate-Palmolive’s detergent business in Colombia earlier this year. I believe that Unilever has a high chance of making a bid for Clorox so that they could have a larger market presence in the home care business and acquire some smaller brands for businesses that they already have a strong presence in, like adding Hidden Valley to its line of foods. Unilever executives are very good at making cost cuts judging from 41 percent contraction in employees from 2000 to 2008, and could gain value from an acquisition of Clorox by expanding Clorox’s margins.
Procter & Gamble (PG)
If Procter & Gamble acquired Clorox, its already impressive line of household care brands would become much stronger. With a market cap of $172.5 billion, compared to Clorox’s market cap of $9 billion, an acquisition of Clorox at Icahn’s bidding price would decrease Procter & Gamble’s stock price by a little less than 1 percent, so current holders of PG should not be too concerned about losing substantial value if a purchase is made. The value P&G would receive from acquiring Clorox would mostly be from reducing costs from synergies. Procter & Gamble already has strong distribution channels, and I doubt its bargaining power could be strengthened since the retailers they sell to normally carry P&G brands from several of its businesses. Unless P&G is really looking to grow in size, it seems unlikely that an acquisition would take place.
The market does not have a strong belief that anything will come of Icahn’s aggressive stance on buying Clorox. Clorox shares trade about 13 percent below Icahn’s $78 “backstop”. My prediction for now is that Clorox will potentially receive bids from Colgate-Palmolive and Unilever, and if not, Icahn will continue to try and replace the board of directors, so he could sell each of Clorox’s brands individually. Carl Icahn is a billionaire for a reason and will do everything in his power to ensure that Clorox gets sold. If Icahn's move fails and he does not come through on his promise, expect Clorox shares to drop by about 10 percent in the current market, so it trades at P/E ratios similar to those of its competitors. An acquisition by Carl Icahn will push share prices to just under the $78 percent backstop, although I wouldn't be surprised if Icahn revised his bid to a lower price like he has done already. If a bidding war over Clorox begins, I expect the acquisition price to be more than $78 per share, but not any higher than about $85, since that would be a very large premium based on Clorox's earnings. Keep in mind that the market knows full well about Icahn's plans and reputation so the potential of an acquisition is already priced into Clorox's stock price. However, there is money to be made if you can correctly speculate the result.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.