Did Dial Take Henkel to the Cleaners?

Source: CMR


While the Henkel Group and Dial Corp. point to a win-win situation for each company in the pending $2.9 billion acquisition of Dial by Henkel, Wall Street is taking a different view. Dial, which put itself on the selling block over two years ago, finally secured its wish to become part of a larger, global enterprise. Henkel, which has been seeking to make an acquisition, not only adds to its laundry and personal care portfolios, but also gains a stronger presence in the US market. But analysts say the asking price is too high and the move does not really build the critical mass in consumer products that Henkel needs.

Last month Henkel agreed to acquire Dial for $2.9 billion, plus the assumption of $100 million in debt. The deal, which is still subject to Dial shareholder approval, is expected to close in April. Henkel will finance it with available liquid funds and debt, part of which will come from still available proceeds from the  2.5 billion ($3.12 billion) disposal of its specialty chemicals business, Cognis, in 2001. Henkel says it may also consider funding the acquisition by selling a significant portion of its minority investments in US cleaning materials supply firms Clorox or Ecolab, or a combination of both.

Henkel says the Dial acquisition achieves two important goals-a stronger North American presence and more critical mass in consumer products. "The planned acquisition of Dial is very important for us and will greatly reinforce our branded products business in North America," says Ulrich Lehner, CEO of the Henkel Group. "Dial has a portfolio of strong brands and leading market shares in its main product categories, where it generates attractive margins. The company has an excellent management team and highly motivated employees and represents terrific growth opportunities in North America."

In acquiring Dial, Henkel will add around  1.2 billion of revenues to its existing businesses. The combined company would have sales of  10.9 billion. The North American contribution to Henkel's sales would increase from 14 to 23 percent, and the contribution of consumer product sales would increase to 74 percent of total sales.

"Dial fills the geographic gap in Henkel's global consumer portfolio," adds Lothar Steinebach, chief financial officer of Henkel. The US market is the key geographic target for Henkel, particularly the large US-based retailers. Roughly 92 percent of Dial's sales are domestic, with Wal-Mart, the largest US retailer, accounting for 28 percent of Dial's 2002 sales of $1.18 billion. Overall, Dial's top ten customers accounted for 57 percent of Dial's sales in 2002. Henkel is also looking to increase its presence in the laundry and personal care segments, which combined accounted for 65 percent of Dial's sales in 2002.

"Dial is the largest player in the fast-growing value tier of liquid laundry detergents, and its liquid and bar soaps have experienced strong growth in recent years," says Klaus Morwind, executive vice president, household products, Henkel. "This, combined with Dial's strong customer position with the fastest growing retailers and its robust new product calendar in 2004, provides an excellent growth opportunity for Henkel's consumer products business."

Dial is organized around four main product areas: laundry care, personal cleansing, air fresheners and food products. Laundry care is Dial's largest business, accounting for 36 percent of 2002 sales, or $466.6 million. This business includes Purex detergents, bleach and fabric softeners, the company's leading brand in laundry care. Other brands in Dial's laundry care portfolio include Zout stain remover, Trend detergent, Borateem bleach, Sta-Flo starches, Boraxo soap, 20 Mule Team borax, and Fels Naptha laundry soap. Led by Purex, Dial estimates that its volume share of the US detergent category in 2002 was 13.7 percent and its dollar share was 8.6 percent. Through the first nine months of 2003, its laundry care sales were $363.30 million, up 5.4 percent year over year.

Dial's personal cleansing business accounted for 29 percent of its 2002 revenues, or $367.8 million. This business includes its leading brand Dial as well as Coast and Tone soaps and body washes and Pure & Natural soaps. Sales of the subsidiary ISC Inter-national, Ltd., a manufacturer of trans-lucent soaps, and sales of soap pellets and chemicals, principally glycerin and fatty acids (which are by-products of the soap making process), also are included in the personal cleansing business. Dial's personal cleansing business had volume market share of the US soap category of 20.0 percent in 2002 and a dollar market share of 17.6 percent, according to company estimates. Dial puts its body washes for the Dial, Tone and Coast brands at third in the US based on 2002 data, and the Dial liquid soap brand at second largest in the US. Through the first nine months of 2003, the company's personal cleansing products business posted sales of $285.86 million, up 3.4 percent year over year.

Dial's air fresheners segment accounted for 13 percent of the company's sales, or $162.5 million, in 2002. It includes a wide variety of air freshener forms and fragrances, all marketed and sold under the Renuzit brand. Its air fresheners business had a unit market share of the US air freshener category of 22.4 percent and a dollar market share of 15.1 percent in 2002, making it the second-largest brand of air fresheners in the US, according to Dial. Through the first nine months of 2002, the company posted a sales gain of only 1.2 percent in air fresheners to $120.17 million.

Dial's food products business, which accounted for 14 percent of its sales in 2002, includes Armour and Armour Star canned meats, chili, hash and meat spreads and Cream cornstarch. It also manufactures and sells shelf stable food products for third parties.

Dial, regarded as a mid-sized player in the consumer products market behind top companies such as Procter & Gamble Company, Unilever PLC and Colgate-Palmolive, had made no secret of its desire to be acquired, first publicly putting itself on the block in 2001. "[This] is the culmination of a strategy put in place three years ago to serve the long-term interests of the company and its shareholders by making Dial part of a larger, global enterprise," says Herb Baum, chairman, president and CEO of Dial. "Henkel will be an outstanding partner and will bring additional scale, resources and technology to continue to grow Dial's presence in new and existing markets," he says. "This is clearly a win-win transaction for both companies."

Mr. Baum, who became the head of Dial in 2000, will continue in his role as CEO of Dial for the next two years. Henkel says it also wants to retain other members of top Dial management. After posting losses of $11.01 million in 2000 and $132.25 million in 2001, Mr. Baum was able to post a $16.89 million profit for Dial in 2002. Through the first nine months of this year, the company posted net income of $100.98 million on sales of $998.13 million.

Over the last several years, Dial has restructured in an effort to improve its financials and has worked to reduce debt. In 2001, it sold its specialty personal care business for $14 million in a move to divest the company of under-performing assets. That business included the Freeman and Sarah Michaels brands and consisted of a variety of skin, hair, bath, body and foot care products. Dial had to take a 2001 charge of $198.4 million for that divestiture. It also took a $62.4 million loss in 2002 for its then-pending sale of Dial Argentina SA, including the stock of two subsidiaries, Sulfargen SA and Dial Corporation San Juan SA. Dial completed the sale of those entities to the Southern Cross Group, a private equity investor in Argentina, last June, gaining $7 million in cash and $61 million in tax benefits.

Wall StreetIs Less Excited

Although Henkel has been looking for an acquisition to beef up its consumer products business, analysts are not keen on the deal. "I think Henkel paid a pretty penny for Dial and waited too long to make the deal," says one European analyst. "This is a deal that Henkel could have done three years ago, but didn't. It probably did not want to get involved in the restructuring that Dial has done over the past several years, but it has paid for that choice."

Other analysts also point to problems. "Henkel's bid for Dial, in our view, misses a huge opportunity to overhaul and strengthen the Henkel portfolio," says Credit Suisse First Boston (CSFB) analyst Charlie Mills. "That Dial has been up for sale for over two years, and Henkel has missed out on both Clairol and Wella, makes the deal look desperate and the missed opportunity all the more disappointing."

Henkel, which sold its chemicals business Cognis and its stake in a Henkel-Ecolab joint venture in 2001, has been primed for acquisitions, but has lost out on several deals to its rival Procter & Gamble Company (P&G). It took a 6.86 percent stake in Wella AG, a German hair care products company last year, only to lose the ultimate bid for Wella to P&G, which brought Wella for $6.1 billion last September. In 2001, it also lost out to P&G for Clairol, which P&G acquired from Bristol-Myers Squibb Company for $4.95 billion. And last year, Beiersdorf AG, the German personal care giant best known for its Nivea skin products line, made a pre-emptive strike against P&G and other possible bidders such as Henkel by having the German coffee retailer Tchibo Holding GmbH increase its holding in Beiersdorf to stave off possible takeover. Last October, a Hamburg investor group led by Tchibo Holding took a 40 percent stake in Beiersdorf for  4.4 billion. That move gave Tchibo, which already had a 19.6 percent stake in Beiersdorf, another 31 percent interest, which provided Tchibo with a majority interest in Beiersdorf. Although Henkel did lose out on these high-profile deals, it did make a smaller acquisition last month, paying $250 million for the Costa Mesa, Calif.-based hair care products company Advanced Research Laboratories.

Aside from losing out in high stakes consumer products mergers and acquisitions, analysts also say the deal does not meaningfully build Henkel's critical mass in consumer products. Henkel, which posted 2002 sales of  9.66 billion, is split between two major business areas-consumer products (54 percent) and industrial products (43 percent). On the consumer side, sales in its laundry and home care business accounted for 32 percent, or  3.13 billion, and sales in its cosmetics and toiletries business accounted for 22 percent, or  2.11 billion, in 2002. On the industrial side, sales of adhesives accounted for 14 percent or  1.32 billion, and sales in Henkel Technologies, which includes technology for adhesives and surface care, accounted for 29 percent, or  2.76 billion. Other corporate revenues accounted for the remaining 3 percent of sales. Outside of these businesses, Henkel also owns roughly 29.5 percent of Clorox and 28.2 percent of Ecolab, interests that Henkel says it would consider divesting in order to fund the Dial acquisition.

"We find it hard to avoid the conclusion that Henkel has missed its big chance," says CSFB's Mr. Mills. "Oft criticized for its unsatisfactory structure-part industrial, part consumer, with nearly half its value wrapped up in two listed companies-we believe the opportunity was in selling the stakes and building a meaningful presence in one of its core markets," he says. "Instead, the group plans to acquire a collection of small sub-scale assets, thus mirroring its European personal care deficiencies. Henkel may have acquired a US platform, but in our view, not [one] on which it will stand very tall."

Partners Once Again

Whether Henkel will realize the much needed synergies and critical mass from Dial remains to be seen. "We expect growth synergies to arise from further line extensions, the role of existing products in new markets and the launch of new Henkel/Dial products in the US," says Henkel's Mr. Morwind.

The recent Dial-Henkel deal would mark the third time in recent history that the two companies came together in a business venture. In April 1999, Dial formed Dial/Henkel LLC, a 50-50 joint venture with Henkel, which was formed to develop and market a range of enhanced laundry products in North America. In 1999, this joint venture acquired the Custom Cleaner home dry-cleaning business and launched Purex Advanced laundry detergent. In March 2000, Dial formed another joint venture with Henkel named Dial/ Henkel Mexico SA de CV (Henkel 51, Dial 49 percent). This joint venture was formed primarily to develop and market consumer detergent and household cleaning products in Mexico. In May 2000, this joint venture acquired 80 percent of Fabrica de Jabon Mariano Salgado SA de CV, a manufacturer and marketer of consumer detergents and household cleaning products in Mexico.

Both joint ventures were eventually ended, with Dial taking total net losses of $37.6 million for the ventures. This included $30.5 million in special charges related to exit activities. The Dial/Henkel LLC joint venture discontinued operations of Purex Advanced laundry detergents in 2000, and in 2001 the Customer Cleaner home dry cleaning business was discontinued. Dial sold its interest in the Dial/Henkel Mexico joint venture to Henkel for $18.9 million in 2000, taking a $5 million loss on the sale.

Outside of product portfolios, Henkel also gains several manufacturing facilities from Dial. These include: Aurora, Ill. (bar soaps); Fort Madison, Iowa (canned meats); St. Louis, Mo. (dry and liquid laundry detergents); West Hazleton, Pa. (liquid detergents, liquid soaps and fabric softeners); Los Angeles, Calif. (liquid detergents and powdered soap); and Guatemala City, Guatemala (bar soaps).

Fate of Clorox

And Ecolab Uncertain

While Henkel and Dial await closure on their deal, two other companies in the cleaning market-Clorox and Ecolab are considering what the next move by Henkel will be. When announcing its plan to acquire Dial, Henkel said that it would consider selling its roughly 29.5 percent stake in Clorox and its roughly 29 percent stake in Ecolab. Last year, Henkel set up some of the framework for divesting its stake in Clorox by authorizing a share repurchase of $50 million for Clorox and another $255 million share repurchase over the next two years. However, analysts are not so sure that Clorox would necessary take the bait and repurchase its shares or if Henkel would necessary sell its stake in Clorox.

"There has been no specific indication from Henkel as to how/if/when it intends to liquidate its position in Clorox," says Credit Suisse First Boston (CSFB) analyst Lauren Lieberman.

It is also unclear how Clorox may proceed. A direct repurchase of its stock would be accretive to Clorox. Repurchasing Henkel's 66 million Clorox shares would be significantly accretive to Clorox's earnings (38 cents per share or 15 percent) discretionary cash flow (36 cents per share or 26 percent), explains Ms. Lieberman. However, of significant concern is how the repurchase would affect Clorox's credit rating.

"As for the likelihood of Clorox repurchasing Henkel's stake, we think the most important issue is whether or not Clorox would maintain its investment grade status in the process," says CSFB's Ms. Lieberman. "We estimate that Clorox would need to more than triple its debt load, and there would be a significant change in its key credit ratios." Clorox is currently rated A+ by Standard and Poor's and A1 by Moody's. The analyst looked at three key financial ratios in before (no repurchase) and after (repurchase) scenarios-(1) EBITDA (earnings before interest, taxes, depreciation and amortization) interest coverage, (2) total debt to capital and (3) total debt to EBITDA. Using S&P's median ratios for the industrials group, a Clorox post-repurchase would fall in the BBB category.

"We do not think management is willing to risk its credit rating," says Ms. Lieberman. "We would expect the company to finance any potential stock buy-back in a way that would preserve its investment grade status," she says. "One possibility is a direct repurchase of the entire stake, and a Clorox-led secondary offering of a portion of the repurchased shares."

P&G Also Makes Move

Although Henkel-Dial was the major deal in the household sector in 2003, P&G also made a move to increase its position in laundry detergents by acquiring several Colgate-Palmolive heavy-duty laundry detergents brands in Western Europe. The products included Axion and Gama in France, Dynamo in Denmark, Dinamo in Italy and Ajax in Sweden.

"This deal is great news for P&G," says Paul Polman, president of Western Europe for P&G. "It is fully in line with our strategy to focus on and build our fabric care business-a core category for P&G."

P&G accounts for over one-third of the laundry detergent market in Western Europe, according to Euromonitor PLC, a London-based market research firm. The newly acquired brands, which had combined sales of $100 million, brings P&G's regional share to roughly 36 percent. The most significant impact will be in France, the second largest laundry detergent market in Europe after the UK, where Henkel and Unilever hold the number one and two positions. The acquisition of Axion and Gama in France makes P&G the number one player in France, whose detergents market is valued at  1.4 billion, according to Euromonitor.

The acquisition of the Dinamo brand in Italy, Europe's fourth largest market, will increase P&G's top position by roughly 1.3 percentage points, where it faces steep competition from Henkel and Reckitt Benckiser.

P&G's four major European brands are Ariel, Bold, Daz and Fairy. The Ariel brand has been pressured by a decline in powder sales.