With the stock market tipping the scales at new highs, there has been a veritable smorgasbord of merger and acquisition activity. In just the past few weeks we’ve seen the largest leveraged buyout in the technology sector since the recession with Silver Lake Partners and Michael Dell’s ongoing battle to take PC maker Dell Inc. (NASDAQ:DELL) private for $24.4 billion. In the airline sector we had the drawn-out merger announcement between US Airways Group, Inc. (NYSE:LCC) and American Airlines parent AMR, which is aimed at reducing flight overlap, trimming costs, and boosting operating efficiency.
But no deal stands out more notably to me than the $23.2 billion purchase of H.J. Heinz Company (NYSE:HNZ) by the consortium of Berkshire Hathaway Inc. (NYSE:BRK.A) and Brazil’s 3G Capital Partners. Heinz is a household condiment name — known best for its ketchups — and it just makes money! Businesses that “just make money” might be a little boring from a growth perspective, but they generally offer solid long-term prospects, have few fluctuations when the economy ebbs and flows, and are often on the radar of conglomerates looking to add a top-notch brand-name to their portfolio.
Today I want to examine three brand-name consumer-goods companies that I think could be next up on the auction block. Let’s make this clear: These are my best guesses, and I have nothing more to substantiate these claims beyond what I’m stating here, so don’t go clicking the “buy” button tomorrow just because I said I think it’s a buyout candidate without first digging deep into these companies for yourselves. Consider this the introduction to your homework!
Energizer Holdings (NYSE:ENR)
The bunny hasn’t had an easy go of things since the recession hit, as Energizer Holdings (NYSE:ENR) announced in November that it was slashing close to 10% of its 16,000 global workforce to save $200 million annually. But as the commercials always state, even if the times get tough, that little bunny just keeps going, and going, and going.
Energizer Holdings (NYSE:ENR), which makes various sized batteries and razors for personal use, plans to use its $200 million in savings by investing a quarter of it in long-term growth initiatives, while also streamlining its current operations. In other words, competition in batteries has increased from Spectrum Brands Holdings, Inc. (NYSE:SPB) with its Rayovac brand, and the battle for razor supremacy is heating up between it and The Procter & Gamble Company (NYSE:PG), which owns Gillette. Energizer has responded with solid cost-reducing and efficiency-improving measures that should continue to drive its cash flow regardless of the economic conditions.
Why I think Energizer Holdings (NYSE:ENR) makes a compelling takeover candidate is pretty simple. First, it’s a global brand with sales in 50 countries. The further the reach of your product, the less fluctuation in sales if a region falters. Second, it sells products with inelastic prices and steady demand. You can shop around all you want, but the price of batteries isn’t going to change much, if at all, from one place to the next — the same goes for razors — allowing Energizer a good predictor of where its operating cash flow will fall each quarter and allowing it to keep up with the rising cost of goods used in its products. Finally, the valuation makes sense. Energizer is valued at just a smidge below 9 times enterprise value relative to EBITDA — a pretty inexpensive level by my standards, which would make the bunny a perfect buyout candidate.
The Goodyear Tire & Rubber Company (NASDAQ:GT)
Like Energizer Holdings (NYSE:ENR), Goodyear didn’t have very much luck coming out of the recession. It was forced to restructure its operations during the height of the downturn in 2009 by eliminating jobs and reducing work times.