Carl Icahn's Clorox Pipedream

The taste test results are in: Chocolate and peanut butter? Yummy! Ranch dressing mixed with Clorox (NYSE: CLX) bleach? Not so much.

Yet investing icon Carl Icahn has given his stamp of approval to the strange amalgamation of brands that makes up Clorox. On Friday, Icahn announced that he wants to up his 9.4% stake in Clorox, bidding to buy the whole company for $76.50 per share.

Icahn says he wants to wake up investors to the value inside Clorox, and thereby boost the value of his own Clorox shares. More importantly, he hopes that by firing the first shot in a bidding war for Clorox, he can entice additional buyers to join the battle for control of the company.

Will it work?

$100 for a bottle of bleach
According to Icahn, there's a whole raft of potential buyers out there, including Procter & Gamble (NYSE: PG), Unilever (NYSE: UL), Colgate-Palmolive (NYSE: CL), and Kimberly Clark (NYSE: KMB). Any of them, Icahn says, should be happy to pay $100 a share for Clorox, which currently costs less than $75. Let's crunch a few numbers and see whether that assertion makes sense:

On the face of it, Icahn's plan sounds crazy. He seems to be suggesting that folks who never entertained the idea of buying Clorox before today will now happily pay a P/E ratio twice what any of their own shares fetch, just for the privilege of owning Clorox. And just because Icahn raised the suggestion.

If you agree with Icahn's underlying assumption that Clorox has been mismanaged, and that it isn't getting all the profits it should be getting out of its stable of brands, there's some wiggle room here. Clorox is growing faster than Kimberly-Clark, so it's possible that "buying some growth" there might appeal to the tissue titan. Clorox's $5.5 billion in annual sales, which fetch a lower price-to-sales ratio than Colgate-Palmolive's stock, might seem an attractive asset to Colgate. But I still fail to see why Icahn might think Clorox attractive to Procter & Gamble, for example, or to Unilever -- both of which are growing as fast as or faster than Clorox, and whose shares are cheaper by almost any measure.

It just doesn't make sense to me.

Method in madness
But it might make more sense to use last week's announcement as a way to wring some value out of Clorox without attracting a higher bid. I think that's Icahn's real plan here. He could accomplish this by buying Clorox, then selling off a few of its constituent parts to reveal a more rational core company beneath. Alternately, he could spur Clorox's current management to make similar moves on their own, rather than allowing their company to fall into Icahn's hands.

While I doubt Procter & Gamble would have any desire to own Clorox's Hidden Valley or K.C. Masterpiece brands, Icahn might well entice the personal-care products company into buying Burt's Bees away from Clorox. (To be honest, I thought Clorox buying Burt's was a mistake in the first place.) Similarly, Hidden Valley and K.C. Masterpiece would fit better on store shelves next to J.M. Smucker (NYSE: SJM) brands than in the bleach aisle with Clorox. And Smucker's not averse to picking up strong brands when they go on sale.

Fresh Step? Scoop Away? Kingsford? Perfect fits for Oil-Dri (NYSE: ODC), and a great way for that little company to grow into the big time. Once you strip away the "extra" brands, you'd be left with a lean, mean, cleaning-focused Clorox. A company that's finally able to focus on its core competencies and reward shareholders better than it's done in the past. Or failing that, a perfect niche acquisition for someone like Procter & Gamble. The Clorox slots right in there next to the Tide.

Foolish takeaway
When you get right down to it, Icahn's plan to attract a $100 bid for Clorox fails the logic test. It's not going to happen -- but that doesn't mean the bid itself is bunk. Seems to me, there are plenty of ways Icahn's "offer" to buy Clorox can work out for shareholders.

But first, you need to remove the Clorox from the ranch dressing.