It’s The Edge Of The Well As We Know It(And I Feel Fine)- Barron’s Sees 50% Upside For Edgewell Personal Care(EPC)

There are worse names in the spinoff world, but Edgewell Personal Care(EPC) is a fairly bad one. Made worse, no doubt, by the company’s tortured explanation of its deep meaning. Edgewell, which owns such personal care brands as Schick, Skintimate, Hawaiian Tropic, and Playtex, spun off Energizer Holdings(ENR) in July 2015. Edgewell stock has underperformed since, recently down 20% from its post-spinoff price. Edgewell is in a slow growth industry and its shaving business in particular has been under pressure from new entrants like Dollar Shave Club.

Despite this, in a recent article, Barron’s identifies Edgewell as a likely acquisition target which could fetch 50% above the current price based on comparable transactions.

Notably, in shaving, Edgewell’s Schick razor business is the only major competitor behind Procter & Gamble’s Gillette. Edgewell, too, is a bite-sized company (market cap: $4.2 billion) in a market that’s dominated by giants like Procter & Gamble and Unilever.

Its small size and stable of high-quality brands could garner Edgewell the interest of a suitor. While that’s been a possibility for some time, pressures in the industry to accelerate growth appear to be building and could lead to a step up in acquisition activity. A little over a week ago, Unilever spurned a $140 billion buyout offer from Kraft Heinz.

In a report out this month, RBC Capital Markets analyst Nik Modi puts a takeout value for Edgewell at $114 a share, more than 50% above the current share price.

That’s equal to 17 times this year’s estimated Ebitda (earnings before interest, taxes, depreciation and amortization), and in-line with past deals for scare, high-quality consumer goods assets, like the 2010 deal for SSL, the maker of Durex condoms, and the 2011 buyout for hair and skin products specialist, Alberto-Culver. Modi lists a number of prospective acquirers, including Unilever, Reckitt Benckiser, and Colgate-Palmolive.

What makes Edgewell particularly attractive is its lack of exposure in emerging markets. A multinational could use its scale and distribution network to grow the business. There’s also a margin opportunity. Edgewell’s margins in its shaving business are roughly 20% compared with P&G’s 30%.

Unilever has long been thought of as a possible suitor for Edgewell. Now that the Kraft deal is off, Unilever will likely need to prove to its shareholders that it can create value on its own. That could create some urgency to do its own deal of some kind.

Ultimately, whether the buyer is Unilever or someone else, we wouldn’t be surprised to see Edgewell acquired in the next two years.

We think the valuation suggested is a bit frothy. These are not exciting brands, and, as pointed out, margins are weaker than competitors. While an acquisition may indeed be in the cards, it is unlikely to be at 50% above the current trading price.

Disclosure: The author has no position in any stock mentioned



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