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Dial 'T' for Takeover

With Dial's stock off 46%, the soapmaker looks more like an attractive takeover target.

With its market capitalization slipping away,

Dial

(DL) - Get Report

is looking more and more like a takeover target.

Trading at just under 13, many industry watchers say the maker of Dial soap and

Armour Star

canned meats might make an attractive purchase for global consumer products players like

Sara Lee

(SLE)

or Germany's

Henkel

.

"Dial is significantly undervalued," says Kevin Grant, an analyst at money manager

Harris Associates

, which owns Dial, Sara Lee and

Unilever

(UL) - Get Report

. "There are multinational companies that would be interested in having some of their brands."

Dial's stock has gained some ground since March 10, when shares plunged 23% after the company

announced its earnings for the year's first half would fall short of expectations. But analysts say it could be a while before the stock fully recovers.

It's off 46% this year, a drop almost as steep as

Procter & Gamble's

(PG) - Get Report

49% decline, and it's sharply underperforming competitors like

Colgate-Palmolive

(CL) - Get Report

and Unilever, whose shares have fallen 16% and 18%, respectively.

"With

Dial shares currently trading 20% below its $14.50-per-share spinoff valuation in 1996, it is high on the radar screen as a potential takeover candidate," Andrew Shore, an analyst for

Deutsche Bank Alex. Brown

, wrote in a recent note. (Deutsche Bank hasn't done recent underwriting for Dial.)

"Given its diverse brand portfolio, we believe a sale would occur in several pieces, which could take longer to execute and would result in a significant corporate capital gains tax," added Shore, who estimates a sum-of-the-parts valuation of 17 to 18 a share, after giving rise to the corporate tax hit.

A Dial spokeswoman declined to comment on the issue.

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Making Dial more vulnerable to bids is the growth of large, global retailers that prefer the ease and efficiency of dealing with fewer suppliers that can provide a wide variety of consumer products. Though Dial's products are well known in the U.S., only 10% of the company's $1.7 billion in sales last year came from international markets.

"Longer term, the retail consolidation coupled with the need for faster-growing markets augurs that Dial needs to be a larger company," says Jim Dormer, an analyst at

Morgan Stanley Dean Witter

, which has done no recent underwriting for Dial.

Germany's Henkel seems to lead the list of potential suitors. Dial formed a joint venture with the company last year to develop and market laundry detergents in the U.S. The companies expanded that venture into Mexico last week, buying an 80% stake in Mexican soap and detergent maker

Fabrica de Jabon Mariano Salgado

.

With 71% of its sales within Europe, Henkel has been keen to enter other markets through joint ventures and equity stakes. The company also owns a 25% stake in

Clorox

(CLX) - Get Report

.

And Henkel could be gearing up to get more aggressive. In its earnings announcement Wednesday, the company said it plans to repurchase up to 14.6 million of its shares for an employee stock incentive plan and possible acquisitions.

Henkel Chairman Hans-Dietrich Winkhaus has also said the company is prepared to make large acquisitions, should the opportunity arise. With sales of 11.4 billion euros ($10.9 billion) in 1999 and cash flow of 1.25 billion ($1.2 billion), Henkel has plenty of cash on hand for purchases.

A Henkel spokeswoman declined to comment about the company's acquisition strategy.

In the U.S., Chicago, Ill.-based Sara Lee, which makes everything from

Wonderbras

to

Ball Park Franks

, has been on an acquisition spree. The company bought

Hills Bros.

,

MJB

and

Chase & Sanborn

coffee assets from

Nestle USA

in December and recently launched a hostile bid for U.K. apparel manufacturer

Courtaulds Textiles PLC

.

With only 8% of Sara Lee's body care and household sales in the U.S. last year, Dial's strong U.S. presence could be a nice fit for Sara Lee's portfolio, say some analysts. A Sara Lee spokeswoman declined to comment on the company's acquisition strategy.

Sara Lee also has a $5.2 billion food unit with $4.1 billion in sales of meat products. George Bryan, Sara Lee Foods' CEO, recently said the unit is looking to purchase meat and bakery companies with sales of $100 million to $500 million in the U.S. With sales of $246.5 million in fiscal 1999, Dial's Armour could fit the bill.

Jimmy Dean

sausage and Armour Star pork brains and gravy anyone?

Whatever Dial's fate, analysts say the challenge for the company will be getting its products to stand out amid the ever-growing sea of consumer products lining the supermarket aisles -- a challenge that might more easily be met as a bigger company.