Edgewell Personal Care’s shares slid 15% Thursday after the parent of the Schick razor-blade brand said it is buying the owner of Harry’s Shave Club in a cash-and-stock deal valued at $1.37 billion.
Edgewell EPC, -15.80% said it would pay 79% of the price in cash and the remainder in stock, financing the deal with a mix of cash on hand and new debt and equity.
“Building on Edgewell’s and Harry’s complementary strengths, our combined company will have leading brands and omni-channel capabilities that are essential to meet the needs of the modern consumer and win in today’s market environment,” said Rod Little, who became chief executive and president of the company on March 1, after serving as chief financial officer for about a year.
“We didn’t see that coming,” said Wells Fargo analyst Bonnie Herzog of the deal’s announcement.
Harry
Harry’s razors are recognizable by their colorful handles.
“The multiple Edgewell is paying is unclear, but strategically the deal makes sense as it has been playing from behind on e-commerce and the combination immediately increases EPC’s scale and capabilities,” Herzog wrote in a note to clients.
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The move comes as the razor business continues to grapple with the rise of online shaving clubs, a craze started by Dollar Shave Club, which offers a razor and supply of blades by mail every month for as little as $3.
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Dollar Shave Club was acquired by Anglo-Dutch consumer goods giant Unilever UN, -0.12% ULVR, -0.39% for about $1 billion in 2016. That put the company into direct competition with Procter & Gamble Co.’s PG, -0.31% Gillette, which has traditionally been the market leader in shaving products and razor blades.
Gillette has been forced to cut prices and spend more on marketing to compete with online startups. Edgewell said Thursday its second-quarter sales fell 10% to $546.7 million, below the FactSet consensus forecast of $562 million.
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Net income came to $48.2 million, or 89 cents a share, down from $65.1 million, or $1.20 a share, in the year-earlier period. Adjusted per-share earnings came to $1.13, ahead of the $1-a-share FactSet consensus.
Executives spent most of the company’s earnings call discussing the deal.
“Harry’s brings modern brand building, design, best-inc lass [direct-to-consumer] capabilities, driven by a strong technology platform, robust performance marketing and analytics and a disruptive omnichannel approach,” said Little.
As part of the deal, Harry’s co-founders, Andy Katz-Mayfield and Jeff Raider, are to join the Edgewell executive team and lead the combined business in the U.S. Harry’s shareholders are in line to own about 11% of Edgewell once the deal is closed.
“As you know, growth in [consumer goods] has slowed over the past years,” said Little, with “lack of innovation, confusion at shelf and the lack of brand resonance” contributing to the issue. “And additionally, legacy personal-care brands have struggled to connect with consumers over direct sales channels with personal care well behind many other categories in terms of e-commerce penetration at approximately 10%.”
Little said Harry’s will break even on an EBITDA basis, or earnings before interest, taxes, depreciation and amortization, in 2019. Edgewell is expecting per-share earnings of $2.16 to $2.46 for fiscal 2019, up from previous guidance of $2.09 to $2.39.
The new outlook includes restructuring charges from a cost-cutting plan it calls Project Fuel, costs for integrating other recent acquisitions, expenses relating to an investor settlement and advisory costs for the evaluation of two struggling businesses, feminine care and infant care.
Sales are expected to fall by a percentage in the low single digits.
Shares of Edgewell have fall 22% in the last 12 months, while the S&P 500 SPX, -0.21% has gained 6%.
See also: 5 ways to save on shaving
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