With the stock market tipping the scales at new highs, there has been a veritable smorgasbord of merger and acquisition activity. In just the past few weeks we've seen the largest leveraged buyout in the technology sector since the recession with Silver Lake Partners and Michael Dell's ongoing battle to take PC maker Dell private for $24.4 billion. In the airline sector we had the drawn-out merger announcement between US Airways and American Airlines parent AMR, which is aimed at reducing flight overlap, trimming costs, and boosting operating efficiency.
But no deal stands out more notably to me than the $23.2 billion purchase of Heinz (UNKNOWN:UNKNOWN) by the consortium of Berkshire Hathaway (NYSE:BRK-B) and Brazil's 3G Capital Partners. Heinz is a household condiment name -- known best for its ketchups -- and it just makes money! Businesses that "just make money" might be a little boring from a growth perspective, but they generally offer solid long-term prospects, have few fluctuations when the economy ebbs and flows, and are often on the radar of conglomerates looking to add a top-notch brand-name to their portfolio.
Today I want to examine three brand-name consumer-goods companies that I think could be next up on the auction block. Let's make this clear: These are my best guesses, and I have nothing more to substantiate these claims beyond what I'm stating here, so don't go clicking the "buy" button tomorrow just because I said I think it's a buyout candidate without first digging deep into these companies for yourselves. Consider this the introduction to your homework!
Energizer Holdings (NYSE:ENR)
The bunny hasn't had an easy go of things since the recession hit, as Energizer announced in November that it was slashing close to 10% of its 16,000 global workforce to save $200 million annually. But as the commercials always state, even if the times get tough, that little bunny just keeps going, and going, and going.
Energizer, which makes various sized batteries and razors for personal use, plans to use its $200 million in savings by investing a quarter of it in long-term growth initiatives, while also streamlining its current operations. In other words, competition in batteries has increased from Spectrum Holdings with its Rayovac brand, and the battle for razor supremacy is heating up between it and Procter & Gamble, which owns Gillette. Energizer has responded with solid cost-reducing and efficiency-improving measures that should continue to drive its cash flow regardless of the economic conditions.
Why I think Energizer makes a compelling takeover candidate is pretty simple. First, it's a global brand with sales in 50 countries. The further the reach of your product, the less fluctuation in sales if a region falters. Second, it sells products with inelastic prices and steady demand. You can shop around all you want, but the price of batteries isn't going to change much, if at all, from one place to the next -- the same goes for razors -- allowing Energizer a good predictor of where its operating cash flow will fall each quarter and allowing it to keep up with the rising cost of goods used in its products. Finally, the valuation makes sense. Energizer is valued at just a smidge below 9 times enterprise value relative to EBITDA -- a pretty inexpensive level by my standards, which would make the bunny a perfect buyout candidate.
Goodyear Tire & Rubber (NASDAQ:GT)
Like Energizer, Goodyear didn't have very much luck coming out of the recession. It was forced to restructure its operations during the height of the downturn in 2009 by eliminating jobs and reducing work times.
Unlike Energizer, Goodyear, which makes rubber tires and various other rubber products and chemicals, is a bit more intricately tied to the happenings of the global economy. Specifically, weakness in new automobile demand related to austerity measures has sapped growth in Europe, and previous to 2012, high rubber prices had constrained margins. But right now looks like it could be the perfect time for a suitor seeking a brand-name product to pounce on.
To begin with, rubber prices have remained well off their highs for more than two years. Since peaking at nearly $2.81 per pound in February 2011, rubber prices have fallen back to $1.32 per pound -- or roughly the same level they were at in 2008.
With rubber being Goodyear's primary expense, it gives the company the all-clear to do what it can to boost its margins and expand globally.
Second, it's a globally known brand-name product. Even if Goodyear is struggling in Europe, it has other modes of growth, including emerging markets such as the Asia-Pacific region, which demonstrated 6% unit volume growth in the fourth quarter. Goodyear is going to continue to diversify its operations to Asia, Eastern Europe, and Africa to drive growth if it's just not there domestically or in Western Europe.
Finally -- and you'll notice a bit of a theme here -- it's all about the valuation. Goodyear comes with a bit of inherent risk in that it boasts $2.8 billion in net debt, but it's valued at an incredibly cheap 3.5 times its enterprise value relative to EBITDA. Goodyear's full-year guidance of $1.4 billion to $1.5 billion in operating income is simply phenomenal for a company that investors say it worth just $3.4 billion. It's a company I expect to drive into a leveraged buyout, or attract a much larger bidder looking to diversify, in the not-so-distant future.
Of the three companies I'm thinking could be bought out, I'd put the probability of seeing it happen to cleaning-products maker Clorox at the top of my list. Clorox might be an inanely boring business on the surface, with home-care products and various dressings and sauces comprising its revenue source. But compared with a company like Heinz, it offers just as much, if not more, shielding from economic downturns.
Clorox is the perfect example of stability in the consumer-goods sector. Its recently reported second-quarter results in February showed a company with an 8.5% increase in sales as volumes rose 5% and prices jumped as well. It boosted the low end of its projected EPS guidance and raised its same-store sales forecast this year to a gain of 3% to 5% from its previous forecast of 2% to 4%. May I remind you that these gains are being seen all while taxpayers have cut back on spending in lieu of higher taxes and delayed tax refunds?
Clorox is exactly the type of company that would attract a conglomerate like Berkshire Hathaway that was looking for a stable growth story with household appeal. In the previous nine years, Clorox's gross margin has deviated a grand total of just 360 basis points, from 41.2% to 44.8%. That demonstrates Clorox's stranglehold on its costs, the steady demand for its products regardless of economic conditions, and its ability to pass along commodity price increases to consumers.
You might think Clorox looks a bit gassed with its $11 billion valuation and at 18 times forward earnings on paper, but consider as well that its produced $5.45 billion -- half its market value -- in just free cash flow over the past decade, and that's enough to make any potential buyer salivate. I'm frankly stunned Clorox hasn't attracted a bidder over the past decade, and I'd be even more stunned if it survives the next decade without a buyout offer at a reasonable premium to its current price.
There you have my guesses for three brand-name consumer goods providers set to be bought out next. Feel free to leave your own prognostications in the comments section below.
Fool contributor Sean Williams owns shares of Dell but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Berkshire Hathaway and recommends Berkshire Hathaway, Energizer Holdings, H.J. Heinz, and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.