Icahn’s Clorox Bid: Another Dynegy or Mentor?

Will Carl Icahn’s bid to buy Clorox wind up resembling his earlier bid for Mentor Graphics or Dynegy?


Will Carl Icahn’s bid to buy Clorox wind up resembling his earlier bid for Mentor Graphics or Dynegy?

This was the big question surrounding the 75 year-old former corporate raider after shares of the household products company fell about 5 percent below his original offering price of $76.50 and continues even after raising his offer Wednesday to $80. The stock has rebounded sharply, but still trades at $75, below Icahn’s initial offering price.

It didn’t help that Monday Clorox rejected the offer, asserting it undervalues the company. “Our board has unanimously determined Mr. Icahn’s unsolicited proposal is neither credible nor adequate,” said Lead Director Gary Michael, in a statement.

It also didn’t help that at the same timer Icahn bid to buy the company, he strongly recommended the company look for another buyer among the huge global roster of consumer products companies.

Wall Street analysts are also not too enthused about the stock now.

For example, Oppenheimer cut its rating on the shares to “perform” from “outperform.” Deutsche Bank Securities reminded its clients in a note it has a “Hold” rating and a $70 price target.

Other analysts are more optimistic, but doubt the stock will climb much from this point. For example, Morgan Stanley on Friday raised its rating on the stock to “equal weight” and said it believes the stock will trade close to the offer price. This is a sharp course reversal for the investment bank, which just eight days earlier—June 7--cut its rating for Clorox from “equal weight” to “underweight” and set a price target of just $63. Oops!

UBS had a Neutral rating before Icahn’s announcement and a $70 price target. On Monday, it raised that target to $74 but kept its Neutral rating after laying out six different potential scenarios for how the Clorox bid will play out.

It assigned a 40 percent probability that Clorox rejects the bid and business continues as usual. This is exactly what happened on Monday. Under this scenario, UBS believes the stock is worth $70.

It also said there was a 40 percent probability Clorox rejects Icahn’s offer and moves swiftly to improve value. “While Clorox has always been shareholder friendly with its capital allocation we believe the company could perhaps move some actions forward,” it told clients in a report fired off on Monday. It noted management has already disclosed plans to buy back $750million of stock in fiscal 2012, which began on July 1. UBS thinks the company could increase its current plans to buy back stock, take a larger than normal hike in its dividend, or accelerate cost savings programs. Under this scenario, it still only believes the stock is worth $76.

UBS says shareholders should be rooting for a strategic buyer stepping up and buying the company, as Icahn seemed to wish for in his tender offer announcement. UBS thinks under this scenario the stock would zoom to $100. A private equity buyer would value the stock at $84, it adds.

However, Clorox put in a speed bump for a potential hostile takeover on Monday when it instituted a poison pill.

In any case, UBS only assigns a 4 percent chance of a strategic buyer stepping up and paying $100 per share and another 4 percent chance of a PE buyer coming forward.

Rather, UBS asserts that Icahn’s offer to buy Clorox is strikingly similar to his previous bids to buy Dynegy and Mentor Graphics. One of them has worked out while another hasn’t.

UBS points out, for example, that back on February 8 shares of Mentor Graphics jumped 3.7 percent when Icahn said the company should be acquired or put up for sale. Exactly two weeks later, Icahn offered $17 a share to buy the company, a 17 percent premium to its prevailing price at the time, but—as in the case of Clorox—said in a letter to management that “there are potential strategic bidders” for the company that should pay more than he offered.

Alas, no bidder has emerged and on Monday the stock closed at $11.59.

A somewhat similar scenario played out after Icahn late last December offered to buy Dynegy for $5.50 a share, which was 10 percent above the price earlier offered by Blackstone Group. Today Dynegy is still independent.

However, Monday its stock closed at $5.99, nearly 10 percent above Icahn’s offer. And as recently as last Wednesday the stock traded at $6.64, which UBS says is likely attributable to management changes and its $4.4 billion debt restructuring.

Things are never simple or clear cut when it involves Carl Icahn.