By  on November 1, 2007

The Clorox Co., a $4.8 billion manufacturer of household products, and Burt's Bees, the earth-friendly marketer of lip balms and natural lotions, may seem like unlikely bedfellows. But that is exactly what they became Wednesday when the bleach maker announced a $925 million acquisition of the beauty company.

The Oakland, Calif.-based Clorox held a conference call Wednesday for Wall Street analysts, and the questions ranged from exploring the strength of the natural personal care market to Clorox's stance on charcoal pricing, hydrocarbons and crude oil. These wide-ranging topics usually would not be found within one conversation by most makers of natural products, but for the hefty price that Clorox is paying for the Morrisville, N.C.-based personal care product maker, it seems likely that similarly broad discussion will be common in the future.

At first blush, cleanser producer Clorox seems an unlikely hive for a natural company such as Burt's Bees, one that was founded in 1984 by several eco-conscious entrepreneurs. But Clorox is also the maker of Hidden Valley Ranch salad dressing, Brita water filters and Green Works, a new natural cleansing line for the home. That these brands have been able to thrive somewhat independently of Clorox shows that Clorox's intent to keep Burt's Bees a "semi-independently run company" is real, according to one independent observer, Paddy Spence, chief executive officer of natural personal care brand Nature's Gate of Chatsworth, Calif.

Paying close to 18.5 times Burt's Bees' earnings before interest, taxes, depreciation and amortization ($50 million) is high for a personal care company — usually the range is between 10 and 15 times EBITDA, according industry experts. But Kathryn Caulfield, vice president of Clorox's global corporate communications, said, "You have to keep in mind that [Burt's Bees] has grown 25 percent each year over the past three years. That's much faster than natural personal care as a whole." Margins for Burt's Bees hover in the 50 percent bracket, whereas Clorox margins tend to be closer to 40 percent. "[The $925 million] was consistent with other competitive bids for the business and not really out of line," she said.

Based on its current growth and estimated 2007 retail sales of about $170 million, Burt's Bees is expected to add nearly two points of top-line growth to Clorox in fiscal years 2008 and 2009, the company said. Clorox expects the deal will dilute its fiscal 2008 earnings by about 10 cents to 15 cents a share and that it will add slightly to earnings in fiscal 2009. Clorox will fund the all-cash deal through a combination of cash and short- term borrowings. The deal is expected to close by the end of the year and is subject to regulatory approval.Donald R. Knauss, Clorox's chairman of the board and ceo, said during the conference call, "Our evaluation of the business...is primarily based on expanding distribution within current markets. For example, building out distribution in mass, grocery, drug and convenience channels where as you know Clorox already has a large presence...we see potential for continuing to build the brand in additional subcategories such as baby care and into other product adjacencies and other markets, making this certainly a global play for Clorox with possibilities for significant upside potential behind the valid markets that we have."

Burt's Bees' business is made up of lip care, which is a little bit less than 40 percent of revenue, and face and body care, which accounts for 30 percent. The remaining 30 percent is split across several categories including baby, outdoor, gifts and kits. The products are sold primarily in drugstores, specialty stores and bookstores. A significant distribution opportunity is in grocery stores, where the brand only generates $20 million of business, said Knauss. But perhaps the largest opportunity is bringing Burt's Bees into Wal-Mart.

Burt's Bees will remain in North Carolina and John Replogle will continue as president and ceo, reporting to Beth Springer, executive vice president, strategy and growth, Clorox.

Daniel J. Heinrich, senior vice president, chief financial officer of Clorox, anticipates Burt's Bees to grow sales in the low- to mid-teen range for the next few years, driven primarily by distribution gains. These growth rates, he said later in the call, are "fairly conservative."

Nature's Gate's Spence said the acquisition served as an absolute validation for the natural personal care market in several ways.

"[Clorox] calls 'green' a megatrend. That is important because Burt's Bees will impact them not only because of their products, but their positioning in terms of substainability," said Spence. "Also, natural personal care is a high-margin category relative to mainstream personal care. They generate tremendous turns. They'll make more selling a 2-oz. bottle of moisturizer than a half gallon of bleach."

Replogle commented that Burt's Bees fits in with Clorox's growth plan.

"What is striking is how aligned we are in our mission and strategy," he said. "They will be 100 years old in 2013. They have written a strategy where they are redefining themselves and want to move aggressively into health and wellness. This has positioned them for the future."The Clorox deal marks the end of any financial concern for Burt's Bees co-founder Roxanne Quimby, who had retained 20 percent ownership of the company when it was sold to AEA Investors in November 2003 for $175 million.

"She was consulted on the sale and was part of the team that approved the sale," said Replogle. "She has no formal role anymore. Not in a financial way. But she will always be in our culture and we'll continue to consult [her] as we move forward."

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