The Clorox M&A Chronicles

| About: The Clorox (CLX)

By Justin Dove

One has to wonder if activist investor Carl Icahn’s confidence is riding a bit high after the Motorola Mobility (NYSE: MMI) deal his team was able to help initiate.

According to Icahn’s press release on August 30, he is proposing that his board nominees would actively auction Clorox (NYSE: CLX) if elected. To sweeten the pot, Icahn is putting a $78/share backstop on the deal. Icahn is so confident that a deal can be reached, that he will personally put up the funds to buy Clorox at a premium. As of the market close on Tuesday, $78/share would be a 13.9 percent premium on Clorox stock.

“We’ve made a few offers to buy the company,” Icahn told CNBC. “They’ve said they were not feasible, we therefore are making this offer. We can’t quite understand their criticism of the offers we’ve made, but we’re making an offer that I don’t think you can argue about.”

Icahn’s Clorox Takeover Timeline

In case you’re late to the show, here’s a timeline of what has happened so far in Icahn’s attempts to takeover Clorox.

  • July 14 – Icahn made his first bid to takeover Clorox for $76.5 per share. Clorox referred to the bid as “neither credible nor adequate.”
  • July 18 – Clorox’s board adopted a shareholder rights plan, also referred to as a “poison pill.” The plan would take effect if Icahn or any other investor acquired more than 10 percent of the stock. Icahn currently holds a 9.5 percent stake.
  • July 20 – Icahn responded by increasing the offer to $80 per share.
  • August 18 – Icahn nominated 11 individuals to Clorox’s board for election at the next meeting.

Currently, there is no date set for the 2011 annual shareholders meeting.

Icahn seems to be under the impression that Clorox board members are acting in their own interests rather than the shareholders’. So the latest measure seems to be his attempt at putting the decision in the hands of the shareholders.

“The company doesn’t want to put our offer out to shareholders,” Icahn said. “So we’ll say to shareholders, ‘Well, you elect our slate and our board will put it out.’”

That means the board election will be the hinge point. If shareholders reject Icahn’s board nominees, it’s likely that Icahn and his group may back off. Obviously if the board is elected, Icahn will have his way.

The real question here is, ‘Is this really better for the shareholders?’

Potential Suitors for Clorox’s Takeover

Icahn certainly believes shareholders would benefit.

“I believe that this company is better off merged,” Icahn said. “There are certain companies I feel strongly about that. I felt that about Motorola Mobility. And as you know the shareholders benefited greatly by that.”

Icahn claims that if merged, Clorox would offer “great synergies” in the area of home maintenance products. Synergy refers to the basic idea that 1+1=3. In essence, that the sum of two parts is greater as a whole.

Icahn and his team maintain that a larger company would benefit greatly from Clorox’s diverse lines of products. Icahn outlined a list of potential suitors including:

  • Proctor & Gamble (NYSE: PG)
  • Unilever (NYSE: UL)
  • Colgate-Palmolive (NYSE: CL)
  • Reckitt Benckiser Group Plc (PINK: RBGPF.PK)
  • Kimberly-Clark Corp. (NYSE: KMB)

Clorox owns many brands that most consumers wouldn’t realize. Burt’s Bees, Kingsford Charcoal, Hidden Valley, KC Masterpiece and Armor All are just a few of the household names.

According to Icahn’s estimation, even $100/share for Clorox could boost earnings per share for the five listed buyers by “5 percent to 26 percent.”

But this diversity and a solid performance may not be enough to lure a potential suitor. Clorox is expensive compared to these companies. Price-to-earnings for Clorox would be 19.3 at $78/share. That’s a higher multiple than any of the companies listed.

According to calculations by Bloomberg, the potential buyers traded around an average P/E ratio of 15. Clorox would be a whopping 24.7 times earnings at $100/share.

Michael Liss, a fund manager at American Century Investments told Bloomberg, “For all these companies, I don’t see them creating any value for their shareholders by buying Clorox. They don’t need to mess around with buying Clorox. It won’t help the multiple of any of these companies.”

Clorox: A Dividend Aristocrat & Solid Performer

Despite what happens with Icahn, Clorox is a solid stock. It may have been flying a tad high since all the news hit about Icahn becoming active, but much of the buzz has faded. At the end of the day it’s still a solid performer and a dividend aristocrat.

“Obviously if I’m paying $78, I think it’s worth more,” Icahn said.

Investors should keep a close tab on when the date for the annual shareholder meeting is set. If Icahn’s board members are elected, it would likely push the stock close to $78/share very quickly. Even then a potential buyer could swoop in and increase the premium that Icahn is offering as a backstop.

Considering that scenario would fetch a minimum gain of about 13 percent as of Tuesday evening, its something worth watching.

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