Investors in the Elevation Capital Value Fund own a stake in Edgewell Personal Care, read about it below.
Edgewell: A Great Business Model…
“you can sleep pretty well at night if you think of a couple billion men with their hair growing on their faces. /t is growing all night while you sleep. Women have two legs, it is even better. So it beats counting sheep. And those are the kinds of business you look for)…
— Warren Buffett on the shaving business 15th October 1998
Edgewell: Investment Summary
Energizer Holdings, Inc. -> Edgewell Personal Care Company
Edgewell is the personal care business of the old Energizer Holdings.
In 2015, the Company spun off the battery business to the new Energizer Holdings, Inc. (ENR – NYSE listed) and renamed itself Edgewell Personal Care Company (EPC – NYSE listed).
EPC reported annual net sales of US$2.4B (in 2015).
Challenger” Position in Personal Care Market
Edgewell has a portfolio of personal care brands that it acquired in the years since 2003. These brands include Schick, Wilkinson Sword, Edge, Skintimate, Playtax, Hawaiian Tropic, Banana Boat, Carefree, Stayfree, o.b. and others. These brands hold competitive positions in attractive categories within the Personal Care market.
Four Reporting Business Segments:
- Wet Shave (60% of revenue)
- Sun 8: Skin Care (17% of revenue)
- Feminine Care (16% of revenue)
- Infant Care and Other (7% of revenue)
Disappointment and Uncertainty Creates Investment Opportunity
The disappointing results after the separation, and the uncertainty with regard to the Company’s future has seen the share price decline 24% between July 2015 and September 2016. The elimination of dividends also saw a sell-off from institutional investors which require companies to pay dividends.
The rise of new (e-commerce based) competitors such as Dollar Shave Club and Harry’s has “disrupted” the two major players in the wet shave market – P&G and Edgewell. Edgewell is currently developing its own Direct-To-Consumer (DTC) proposition for the fast growing online/DTC market.
- To be acquired by one of the larger players in the personal care industry once two year period from Separation lapses (1 July 2016)
- International market expansion in existing categories
- Capital returns through opportunistic share repurchase and the possibility of reinstating the dividend
- The launch and successful execution of the Company’s DTC proposition that is under development
- Negative macro trends in men’s shaving systems
- Slow response to channel shifting and new competitors
- Customer concentration – Wal-Mart accounts for 24% net sales
- Relatively leveraged balance sheet post separation
- Re-rating downward to 10.7x EV/EBITDA
Edgewell is a relatively small company (Market Cap : US$4.58) in a highly competitive global personal care industry. Its portfolio of strong brands in attractive categories makes it a likely acquisition target for larger players in the industry.
The stock is currently trading at a meaningful discount to our estimated Private Market Value and takeover target price range providing upside potential of+20% to +49%.
Edgewell Formed Via A Separation From Energizer Holdings. Inc.
Edgewell: 1 July 2015 Separation Takes Effect
Following the separation, each standalone company will be able to:
- Intensify focus on its distinct commercial priorities;
- Allocate its own resources to meet the needs of its business;
- Pursue distinct capital structures and capital allocation strategies; and
- Provide a clear investment thesis and visibility to attract a long-term investor base suited to each business.
As an independent entity, we believe Personal Care will be able to:
- Accelerate growth across all categories:
- Execute a focused global go-to-market strategy;
- Grow through disciplined strategic acquisitions; and
- Generate substantial free cash flow that will enable investments and capital return.
Source: Energizer announces intent to separate into two publicly trade companies on 30 April 2014
Edgewell: Tax-Free Treatment Of The Separation
- In its 2015 Annual Report, Edgewell listed the activities which would void its tax-free treatment of the Separation within a two-year period, among them the acquisition of separated Energizer.
- We suspect Edgewell may also wish to wait for the two-year period to end (1 July 2017) to seriously open up merger/acquisition discussions to avoid a potential dispute with the IRS.
- In the meanwhile, the lack of M&A news since the Separation is causing impatient investors to divest the stock.
See the full slides below.