Stock Split Could Short-Circuit Energizer Holdings

The days of empire-building are probably coming to an end as Energizer Holdings (NYSE: ENR  ) becomes the latest conglomerate to split up and focus on core concepts. Yet the divide-and-conquer strategy may not be as effective for the battery maker, as it could end up with two weak companies up against bigger, better-financed rivals.

Spun off from Ralston Purina in 2000, Energizer has spent the last decade and a half gathering together a diverse assortment of businesses. The best known are its Energizer and Eveready batteries, but it also holds Schick razors, Hawaiian Tropic sun care products, Playtex and recently acquired Stayfree feminine care items, and Wet Ones skin care wipes.

Now it proposes to separate its energy division -- the battery brands, plus its portable lighting products -- from its consumer products business in a tax-free spinoff that creates two independent, publicly traded companies. With both enterprises being multibillion-dollar businesses in their own right, a portfolio of respected brands, and the possibility that both could be acquisition targets in the future, the announcement is an intriguing one for investors, but there are plenty of concerns that the stocks would be as resilient as dead batteries.

The nemesis both companies would face is Procter & Gamble (NYSE: PG  ) , the consumer products giant that owns the industry-leading Duracell battery brand, Always female hygiene products, and perennial razor favorite Gillette. Energizer batteries have always come in a distant second to their rival, and, though they account for only a fifth of its sales, they also provide for almost half of the the company's earnings before interest, taxes, depreciation, and amortization. With that profit removed from the consumer products business, the ability to finance R&D and marketing will be severely limited.

Source: Energizer Holdings SEC filing.

Furthermore, sales of batteries have been steadily falling, down 15% in the second fiscal quarter, which was an acceleration of the decline from the first quarter and also represented a dramatic drop from all of 2013, when they fell 2% as Duracell and a trend toward rechargeables pressured results. Indeed, Procter & Gamble reported just the other day that the home care segment that houses the battery brand enjoyed a 6% jump in sales last quarter (though admittedly with Tide and Swiffer in there too, P&G has a powerhouse unit driving it).

And that's actually the problem across all of Energizer's product lines, as they all saw revenues decline year over year, with only feminine care able to mask a better than 10% drop in organic sales because of the acquisition it made last October.

As a result, although both new Energizer companies would have narrower focuses and be able to concentrate on making the moves necessary to benefit each, they'll both be diminished by the separation and will be going up individually against a mighty competitor.

The markets jolted Energizer's stock to levels it hasn't seen since 2007 on the notion that the stock split will unlock shareholder value. It may do that, but there remain risks to the story that could cause it to short-circuit as well, so the growth story isn't nearly as guaranteed as investor reaction would make it seem.

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7/24/2014 2:08 PM
ENR $119.23 Up +1.16 +0.98%
Energizer Holdings CAPS Rating: ****
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Procter & Gamble CAPS Rating: ****

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