Playtex's Odd Acquisition By Energizer (PYX, ENR, PG)

If you thought roll-up mergers expanding into new lines had gone the way of concentrating on core operations, guess again.  Playtex Products Inc. (NYSE:PYX) is being acquired by Energizer Holdings Inc. (NYSE:ENR) in perhaps one of the stranger mergers out there.  Once upon a time in 2000 a dog food operator named Ralston spun-off Energizer so that the companies could focus on core operations, and Energizer shares are up nearly 5-fold since then.  Now Energizer itself is making a transition back into the weir, and it would make one wonder if Cramer still thinks Energizer is heading to $120.00 after he touted it as the easy-money trade just on Tuesday.

Energizer will acquire Playtex for $18.30 per share in cash plus the assumption of Playtex debt, and the deal has been approved by both boards.  Total enterprise value of the transaction after debt is approximately $1.9 billion. The all-cash offer per share represents a 26% premium over Playtex’s closing stock price on July 10 and its average stock price for the past 90 trading days.  This represents an all-time high for Playtex shares.  We named this as a second-line defensive stock in the first quarter when there was a worry of a mini-meltdown.

Energizer is known for batteries and flashlights and is also the parent company of Schick-Wilkinson Sword, the second largest manufacturer of wet shave products in the world.  Playtex makes bras, feminine hygiene products, sun block, moisturizer, diaper disposal systems, toddler products, and more.  Energizer’s CEO, Ward Klein, has also said this will provide a platform for possible additional value-adding acquisitions.   

Energizer noted that the acquisition will be accretive to fiscal 2008 results, but the accounting will be dilutive to earnings for the first turn of acquired inventory and will also negatively impact the second quarter after the closing of the deal.

The combined company will be a stronger growth model, although this still seems a bit odd and is a true 180-degree turn from the spin-off and focus on core operations model that Wall Street is selling to Main Street.  Playtex’s most recent 12 months through March 2007 totaled $641 million sales and EBITDA of $126 million with GAAP earnings of $34 million, not including Playtex’s recent acquisition of Hawaiian Tropic with 2006 sales of approximately $112 million.  Energizer’s sales for the last 12 months came to $3.255 Billion, EBITDA was $607 million, and GAAP earnings was $279 million.

The company claims similar customers, similar distribution channels, geographic expansion capabilities, and integration and cost reduction opportunities all resulting in a more diversified company.  In other words, there is a new conglomerate in town.  If the companies can execute as well as they say then this will make sense.  But it is still strange and you can only imagine the battery powered jokes with so many of the Playtex brands that will be in papers over the weekend.  Proctor & Gamble (NYSE:PG) owns Duracell Battery, so maybe this mini-conglomerate building trade isn’t quite so weird after you can get past the jokes.

Jon C. Ogg
July 13, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.