Never a dull moment with Carl Icahn. The investor put in an unsolicited bid Friday for Clorox ( CLX). At an offer price of $76.50 per share, the proposed deal would equate to just a 11% premium over Thursday's closing price. But Icahn has a different price target for Clorox in mind, one that is substantially higher. As noted in his letter to Clorox CEO Donald Knauss it is likely that his intention is not to buy out the company, but for a white knight to step in and come up with a higher bid, ultimately making Icahn's 9.4% stake worth a lot more then it was worth a few days ago. Icahn encourages Clorox to "hold an open and friendly 'go-shop' sale process where all the synergistic buyers are offered due diligence and invited to bid." Icahn, in typical fashion, offers no guidance or suggestions on how to unlock the potential value with shares. He only offers that, since interest rates are so low, "it seems clear to us that there are potentially multiple substantially larger strategic bidders with robust balance sheets who are in a position to make a bid that reflects significant inherent synergies." So who might these suitors be? In his letter, Icahn offers up Procter & Gamble ( PG) , Unilever ( UL) , Colgate Palmolive ( CL) , Reckitt Benckiser, Kimberly Clark ( KMB), and Henkel AG as potential partners. He even goes so far as to note that at a takeout price of $100 per share, earnings per share for the following potential acquirers would improve by the respective amounts: Kimberly Clark by 26%, Colgate Palmolive by 25%, Reckitt Benckiser by 21%, Unilever by 9%, and Procter and Gamble by 5%. But is Clorox really worth $100 per share? At that price, Clorox would be valued at roughly 25 times 2012 estimates of $4 EPS, or at 12.5 times trailing 12-month EBITDA (based on EV/adjusted EBITDA measure). For an EV/EBITDA comparison Kimberly Clark trades at 9.4 EBITDA, Colgate at 11.3 times, and P&G at 12 times. Obviously, with an acquisition of a highly valued brand portfolio such as that of Clorox (Glad, Fresh-Step, Pine-Sol to name a few), there is certainly a premium baked in, but it would appear that a 12.5 multiple on EBITDA wouldn't be too far off the mark in what we've seen with other past acquisitions. When Gillette was acquired by Procter & Gamble in 2005, it paid what seemed at the time to be a fairly significant multiple of 17 times EV to EBITDA. But the deal turned out to be a huge success for P&G, as the company realized significant synergies. Icahn even referenced this deal in his letter, noting that P&G "was able to achieve cost synergies that exceeded its target of $1.2 billion or 11.5% of Gillette's sales and revenue synergies that exceeded its target of $750 million (7.2% of Gillette's sales)."
Back then, Gillette was firing on all cylinders. In the quarter prior to the deal with P&G, Gillette had just reported a 14% gain in profits, driven by its improving and dominant position in the razor/razor-blade market. But it's not a similar story for Clorox; management recently lowered its 2012 outlook, calling for just 1% to 3% sales growth and lower margins due to higher commodity costs. As Icahn notes in his letter to management, cost synergies would be realized by any of the major players in the consumer products space. Yet, the jury is still out to see whether anyone is willing to pay a market premium for a company that does have a strong brand portfolio, yet has struggled to maintain its competitive position. While we've seen Icahn in this position before trying to lobby for his own personal benefit, my belief is that there is a good likelihood that any of the aforementioned competitors might step in to make a bid on Clorox. It may not be for $100, but a price range of $85 to $90 might be more appropriate from a valuation perspective. At this point, investors should consider shares of Clorox to be a speculative Buy. On fundamentals alone, the stock is probably now appropriately valued, but this potential catalyst for acquisition could result in a short term profit on shares. I never advise anyone to chase a stock based only on the potential for an acquisition, so if you are looking to invest, tread carefully.