Energizer Ripe for Buyout

 | Oct 20, 2011 | 11:00 AM EDT
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Buyout activity continues to remain buoyant, with companies flush with cash and borrowing is cheap.

With little demand to spur growth, companies are using balance sheets to acquire growth. It's hard to predict what the next target will be, but battery and razor maker Energizer (ENR) offers a lot of attractive characteristics to a suitor.

With a market cap of $5 billion and enterprise value of $6.9 billion, Energizer's size is a sweet spot. With $4.5 billion in annual revenues, it's big enough to make a difference as part a much bigger company. At the same time, it's not too big to create financing or antitrust issues.

Between private equity and corporate buyers, there are many players who could easily take on a $9 billion to $10 billion acquisitions. And given the stable earnings along with attractive borrowing terms, the deal could be financed on attractive terms. And a premium is well deserved for Energizer. Fiscal 2010 EBIT was $669 million, or 7.5x earnings, for the trailing 12-month period, a figure that would make financing a deal very attractive.

Its stable and growing cash flows would lure many suitors. Energizer has the most market share for batteries and is either top or second in market share in all its other product categories (sun care products, baby products and razors).

Energizer's brands are supported by years of consumer loyalty and significant advertising. There is little switchover among these product categories once a consumer gets accustomed to using them. The company continues to invest abroad and derives half of its revenue base outside the US. Back in 2005, consumer products giant Procter and Gamble (PG) paid $57 billion to acquire Gillette at a 20% premium, an acquisition Warren Buffett called a "dream deal."

Over the next year, sales and profits should benefit from an increase in battery prices, lower launch costs of new products and a greater focus towards higher-margin items (think more razor blades than razors.) For fiscal 2012, the company's EBIT should come in around $700 million. At a very acceptable takeout price of 10x EBIT, you get a valuation of $7 billion, or around $100 a share vs. $72 today. Smaller rival Spectrum Brands (SPB), which reported a loss in fiscal 2010, currently has a market cap of $1.3 billion, or 9x FY2010 EBIT of $153 million.

Of course, the risks are that the economy worsens and the appetite for buyouts diminishes. For years, ENR has been the acquirer and future acquisition could harm the share price. But anything that causes the share price to decline only makes this company even more intriguing to watch.

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