According to a Bloomberg report, Energizer Holdings Inc. (ENR), a leading manufacturer and marketer of batteries, lighting and personal care products, plans to acquire American Safety Razor Co. for $301 million in cash in a competitive bidding process.
 
Based in New Jersey, privately held American Safety Razor Co., a primary competitor of Energizer, had gone bankrupt and filed for Chapter 11 (bankruptcy) in July as a result of increased competition in its shaving products category.
 
American Safety Razor sells shaving razors to drug stores such as Walgreen Co. (WAG) under the store’s own brand. The company was hard hit by the loss of an important customer Wal-Mart Stores Inc. (WMT) in 2009. The company pointed out that under its current restructuring efforts, it has accepted to sell its assets to its first-lien lenders, led by UBS AG (UBS), for an undisclosed amount to call off the $244 million debt owned by the company.
 
Energizer’s offer price was made during a testimony in the U.S. Bankruptcy Court in Wilmington, Delaware . Energizer will be present at the court hearing but management remained unavailable for any immediate comment.
 
American Safety Razor pointed out that Energizer had breached its previously signed non-disclosure agreement between the two parties. According to American Safety, Energizer’s bid was too low and the acquisition could attract antitrust issues. American Safety is seeking permission by the court to reject Energizer’s bid in favor of a lower, debt- for-equity offer from lenders, as per the Bloomberg report.
 
Acquisitions are an integral part of Energizer’s growth strategy. Energizer Holdings has generated top-line growth through strategic expansions (organic growth in the razor blade and battery businesses and a number of acquisitions in personal care).
 
We remain upbeat about Energizer’s personal care division, which grew entirely from acquisitions. The March 2003 acquisition of Schick-Wilkinson Sword (SWS) business from Pfizer Inc. (PFE), the second largest global manufacturer of wet shave products for men and women, was a major growth driver for the company. The acquisition helped the company increase wet shave sales to $1.12 billion in 2009 from just $625 million in 2002, a CAGR of 8.7%.
 
In June 2009, the company acquired the Edge and Skintimate shave preparation business from Johnson & Johnson (JNJ) for $275 million, adding shaving creams and gels to its SWS razor business portfolio. Skintimate is the leader in the women’s pre-shave product market, followed by Gillette’s Satin Care.
 
Edge is the number 2 company in the domestic men’s pre-shave product market, after Procter & Gamble. Therefore, management believes the strategic acquisitions will better position Energizer to compete with Procter & Gamble Co. (PG) and deliver cost synergies of $5 to $10 million. The acquisition is further expected to provide increased revenue synergies of approximately $150 million annually.
 
Energizer Holdings’ third quarter 2010 earnings beat the Zacks Consensus Estimate by 39 cents per share or 41% based on higher sales, launch of new Schick Hydro, meaningful cost-saving initiatives, favorable foreign currency impact, higher battery sales, lower-than-expected A&P spending and a successful integration of the Edge and Skintimate brands.
 
We anticipate that Energizer’s top line will grow modestly (+4%) in the fourth quarter of 2010 along with an improved operating leverage and organic growth, going forward. The company stands to benefit from its restructuring initiatives, product innovations, strong cash flow, increased debt repayment, share repurchases or acquisitions in the near term.
 
The new Schick Hydro brand, higher margins and an improving condition in its battery business along with a huge third quarter upside in earnings have led us to raise our earnings per share estimates by 7.4% for fiscal 2011. Overall, we believe that Energizer is set for a stronger growth in 2011.
 
However, investors should note that intense competition, inventory destocking and weak consumer environment are potential negatives while growth at Energizer had been inconsistent on a quarterly basis.
 
Energizer Holdings is currently a Zacks #3 Rank stock (short-term Hold rating) although we have an Outperform rating over the long term.
 
ENERGIZER HLDGS (ENR): Free Stock Analysis Report
 
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
 
PFIZER INC (PFE): Free Stock Analysis Report
 
PROCTER & GAMBL (PG): Free Stock Analysis Report
 
UBS AG (UBS): Free Stock Analysis Report
 
WALGREEN CO (WAG): Free Stock Analysis Report
 
WAL-MART STORES (WMT): Free Stock Analysis Report
 
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