Clorox Leaves the Cap Off

Um, Clorox (NYSE: CLX  ) ? I know the "Mountain Fresh" scent of the new bleach formula smells nice and all. But you're supposed to let it gently waft on the air from a line of freshly washed laundry -- not huff it directly from the bottle.

Early Wednesday morning, the news broke that bleach bigwig Clorox was anteing up $925 million in cash, plus another $25 million for anticipated tax benefits, to acquire privately owned "personal care products" maker Burt's Bees. Personal care products are face and body lotions, sunscreen, cosmetics, shampoos, and botanical oils and herbs. It's apparently a growth industry; Clorox's press release asserts that this particular sector of the industry is growing at a pace of 9% per year.

Your mileage may vary on that estimate, however. As Clorox noted, the market is "highly fragmented." Some companies in this niche are growing much faster than the norm, and others are lagging. For example, The Body Shop International posted 16% sales growth for the last 12 months (and a 10% operating margin), while Limited Brands' (NYSE: LTD  ) Bath and Body Works subsidiary experienced a 3.2% drop in sales and 76.6% decline in operating earnings last quarter. Meanwhile, year-over-year revenue growth at Elizabeth Arden (Nasdaq: RDEN  ) has been running at 18%, and 35% at Bare Escentuals (Nasdaq: BARE  ) . Growing closer to trend, Estee Lauder (NYSE: EL  ) grew 9% in the last 12 months, and Avon (NYSE: AVP  ) 10%.

By all indications (and, sadly, indications are all we've got to work with, as Clorox was pretty stingy with its information in the press release), the more "natural" the products, the more supernatural the growth rates. Looking up Burt's Bees at a couple of usually trustworthy financial data sites, I found that Capital IQ thinks the firm does about $15 million a year in sales; Hoover's guesstimates $62.6 million.

Wrong-o
According to Clorox, though, which presumably has done its due diligence and seen the true numbers, Burt's will sell $170 million worth of product this year. Yowza. I know it's hard for data providers to get a fix on a moving target, but to miss by this much -- these bees must be supersonic.

As fast as Burt's is growing, I can certainly see the attraction for Clorox, which has compounded its own sales a meager 3.8% per annum over the past five years. The buyer expects its new prize to add two percentage points of inorganic (pun intended) sales growth once it's brought into the hive -- that's a 50% boost in sales growth in the first year.

But really, a billion bucks?
I know, and yes, I'm leery of the price here. At $950 million total, Clorox is paying 5.6 times current sales for Burt's, whereas its own shares fetch just 1.7 times trailing sales on the market. Seems awfully expensive to me, and I have to wonder just what Lehman Brothers (NYSE: LEH  ) was sniffing when it told Clorox to go ahead with the deal.

Long story short, these bees will have to make an awful lot of honey to justify this price.


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