SEC Company Response from CLOROX (CLX) — Mar 3, 2005
CLOROX CO /DE/ (CLX) (CIK 0000021076)
Date: March 3, 2005 · CIK: 0000021076 · Accession: 0000021076-05-000023
AI Filing Summary & Sentiment
Referenced dates: January 26, 2005
Letter
United States Securities and Exchange Commission Division of Corporate Finance Washington, D.C. RE: SEC Comment Letter dated January 26, 2005 The Clorox Company, Form 10-Q for the Quarter Ended September 30, 2004 File Number 1-7151
Dear Mr. Decker:
In connection with your review of the The Clorox Company’s (“Clorox” or the “Company”) Form 10-Q for the quarter ended September 30, 2004, we respectfully submit the following response to the comments included in your letter of January 26, 2005.
We understand that you will be reviewing our responses and may have additional comments. We welcome any questions you may have concerning our responses and thank you for your attention devoted to our filing. Please feel free to call us at the telephone numbers listed at the end of this letter.
QUESTIONS REGARDING SHARE EXCHANGE TRANSACTION
Comment: Tell us what consideration you gave to your stock price in determining the fair value of the transaction. You attributed a $46.25 fair value to the acquired shares, rather than using the $56.41 closing price on November 22, 2004. Please help us understand why you did not use the closing price.
Response: As further discussed below, the Company determined that the best measure of the fair value of the shares of the Clorox subsidiary transferred to Henkel in exchange for the Clorox shares held by Henkel was the negotiated value of the exchange transaction agreed by the parties. [*****] Use of the market price of Clorox stock on November 22, 2004 would have resulted in overstating the fair value of the assets included in the Clorox subsidiary, including the insecticide and Soft Scrub cleanser businesses (the “operating businesses”) and the equity investment in Henkel Iberica, S.A. (the “equity investment”). Additionally, use of the market price of Clorox stock would have ignored the discount to the market price agreed by the parties to reflect the acquisition of a block of Clorox shares, the tax-free nature of the exchange transaction, and other matters described more fully in this letter.
Background and Rationale: In December 2003, Henkel announced its intention to monetize some or all of its stake in the Company to finance its acquisition of The Dial Corporation. [*****]
After extensive negotiations, Clorox and Henkel agreed to a fair value of $745 million for the operating
businesses and equity investment, and $46.25 per share or $2,839,126,041 for the block of Clorox shares held by Henkel. Henkel received this value by exchanging its shares in Clorox for shares in a
*****The Company has submitted this portion of the response letter separately because it requests that such portion be kept confidential by the Staff pursuant to 17 C.F.R. section 200.83.
subsidiary held by the Company. The subsidiary transferred to Henkel contained the operating businesses, the equity investment, and approximately $2,095,000,000 in cash.
The values of the operating businesses were determined by the Company and Henkel using detailed discounted cash flow analyses, comparisons of sales and EBITDA multiples to multiples of similar transactions [*****]. Attached as Exhibit A, you will find a comparison of value received for the operating businesses, expressed as a multiple of sales and EBITDA, to similar market transactions. The operating businesses were mature businesses with relatively predictable cash flows. Consequently, the Company had a sound basis upon which to develop cash flow estimates and estimates of fair value. Additionally, the companies negotiated a fair value of [*****] for the Company’s equity investment in Henkel Iberica based on the Company’s expected value from the venture, rather than the lower value that would have been realized through application of a liquidation formula in the parties’ existing joint venture agreement. [*****]
Why Market Price of Clorox Stock Was Not Used: Use of the market price of Clorox stock on the transaction closing date was not considered appropriate because it would not have reflected a realistic fair value for the transaction and could have potentially misled users of the financial statements by overstating the fair value of the transaction and gain on exchange.
Use of the market price of Clorox stock at closing would have overstated the fair value for the operating businesses and equity investment when compared to sales and EBITDA multiples of similar market transactions. Using the market price of Clorox stock of $56.41 at closing would have implied a transaction value for the operating businesses of [*****] after subtracting the [*****] negotiated value for the investment in Henkel Iberica. This would have translated to unrealistic sales and EBITDA multiples of [*****] and [*****], respectively, which exceeds any market transaction at that time. See Exhibit B for a comparison of the negotiated fair values for the operating businesses and equity investment, to value ranges based on sales and earnings multiples and discounted cash flow values.
Several other factors demonstrate the market price of Clorox stock was not appropriate to use to value the operating businesses and equity investment. First, the market price on the transaction closing date reflected an increase in value driven, in part, by Henkel’s announcement of its intent to liquidate its investment in Clorox nearly one year prior to the transaction closing date. In December 2003, the month of Henkel’s announcement, Clorox’s stock traded at $47-$49. [*****] The Company also believes it would be inappropriate to use the market price at closing as it was not the basis used to negotiate the transaction. All negotiations were based on the $47-$49 share price around the date of Henkel’s announcement that it may liquidate some or all of its holdings.
Second, because Henkel was eager to dispose of a large block of Clorox shares, the Company was able to negotiate a sizeable discount to acquire a large block of stock from a motivated shareholder. If Henkel were to dispose of its 29% block of Clorox shares in the open market, this block would have taken time to clear the market, would have exerted significant downward pressure on the stock price, and Henkel would have incurred significant transaction costs in the form of brokerage and other fees.
[*****]
*****The Company has submitted this portion of the response letter separately because it requests that such portion be kept confidential by the Staff pursuant to 17 C.F.R. section 200.83.
Authoritative Literature Guiding the Accounting for the Henkel Share Exchange: The share exchange with Henkel was a nonmonetary exchange. Guidance in accounting for nonmonetary exchanges provided under APB Opinion No. 29 and EITF 01-02 prescribes that the “cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchange. Fair value of the asset received can be used if it is more clearly evident than the fair value of the asset surrendered.” Issue #12 in EITF 01-02 specifically provides that a tax-free split-off of a segment of a business should be accounted for at fair value. In the case of the share exchange with Henkel, the fair value of the subsidiary shares given to Henkel was objective and verifiable. More than 70% of the subsidiary value was derived from cash held by the subsidiary. The remaining values were derived from the fair values of the operating businesses and equity investment which were negotiated at arm’s length and supported by traditional valuation methodologies, sales and EBITDA multiples [*****].
Additionally, FASB Technical Bulletin 85-6 acknowledges that transactions do arise in which an acquisition of stock may take place at a price different from routine transactions in the open market. Specifically, “a large block of shares may trade at a price above or below the current market price depending on whether the buyer or seller initiates the transaction.”
Comment: Provide us with the gain calculation and any corresponding supporting schedules
Response: The gain was calculated by subtracting the net book value of the subsidiary and certain transaction fees from the negotiated value of $2,839,126,041. Details of the gain calculation are provided on Exhibit C.
* * * * * * *
*****The Company has submitted this portion of the response letter separately because it requests that such portion be kept confidential by the Staff pursuant to 17 C.F.R. section 200.83.
In addition, in accordance with your letter, the Company acknowledges that:
It is responsible for the adequacy and accuracy of the disclosures in its filings;
It is the Commission’s position that comments from the SEC staff or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
It is the Commission’s position that the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
*******
Contact Information
If you have any questions or need any additional information, please contact Tom Johnson at (510) 271 2873, John Kresich at (510) 271 3127 or me at (510) 271 7377.
Sincerely,
/s/ Daniel J. Heinrich
Show Raw Text
CORRESP
1
filename1.htm
Exhibit A
March 2, 2005
Mr. Rufus Decker
Accounting Branch Chief
United States Securities and
Exchange Commission
Division of Corporate
Finance
450 Fifth Street, N.W., Stop
4-5
Washington, D.C.
20549
RE:
SEC Comment Letter dated
January 26, 2005
The Clorox Company, Form 10-Q
for the Quarter Ended September 30, 2004
File Number 1-7151
Dear Mr. Decker:
In connection with your review of
the The Clorox Company’s (“Clorox” or the
“Company”) Form 10-Q for the quarter ended September
30, 2004, we respectfully submit the following response to the
comments included in your letter of January 26, 2005.
We understand that you will be
reviewing our responses and may have additional comments. We
welcome any questions you may have concerning our responses and
thank you for your attention devoted to our filing. Please
feel free to call us at the telephone numbers listed at the end of
this letter.
QUESTIONS REGARDING SHARE
EXCHANGE TRANSACTION
Comment: Tell us what consideration you gave to your
stock price in determining the fair value of the transaction.
You attributed a $46.25 fair value to the acquired shares, rather
than using the $56.41 closing price on November 22, 2004.
Please help us understand why you did not use the closing
price.
Response: As further discussed below, the Company
determined that the best measure of the fair value of the shares of
the Clorox subsidiary transferred to Henkel in exchange for the
Clorox shares held by Henkel was the negotiated value of the
exchange transaction agreed by the parties.
[*****] Use of the market price of Clorox stock on
November 22, 2004 would have resulted in overstating the fair value
of the assets included in the Clorox subsidiary, including the
insecticide and Soft Scrub cleanser businesses (the
“operating businesses”) and the equity investment in
Henkel Iberica, S.A. (the “equity investment”).
Additionally, use of the market price of Clorox stock would have
ignored the discount to the market price agreed by the parties to
reflect the acquisition of a block of Clorox shares, the tax-free
nature of the exchange transaction, and other matters described
more fully in this letter.
Background and
Rationale: In December
2003, Henkel announced its intention to monetize some or all of its
stake in the Company to finance its acquisition of The Dial
Corporation. [*****]
After extensive negotiations, Clorox
and Henkel agreed to a fair value of $745 million for the
operating
businesses and equity investment,
and $46.25 per share or $2,839,126,041 for the block of Clorox
shares held by Henkel. Henkel received this value by
exchanging its shares in Clorox for shares in a
*****The Company has submitted
this portion of the response letter separately because it requests
that such portion be kept confidential by the Staff pursuant to 17
C.F.R. section 200.83.
subsidiary held by the
Company. The subsidiary transferred to Henkel contained the
operating businesses, the equity investment, and approximately
$2,095,000,000 in cash.
The values of the operating
businesses were determined by the Company and Henkel using detailed
discounted cash flow analyses, comparisons of sales and EBITDA
multiples to multiples of similar transactions
[*****]. Attached as Exhibit A, you will find a
comparison of value received for the operating businesses,
expressed as a multiple of sales and EBITDA, to similar market
transactions. The operating businesses were mature businesses
with relatively predictable cash flows. Consequently, the
Company had a sound basis upon which to develop cash flow estimates
and estimates of fair value. Additionally, the companies
negotiated a fair value of [*****] for the Company’s
equity investment in Henkel Iberica based on the Company’s
expected value from the venture, rather than the lower value that
would have been realized through application of a liquidation
formula in the parties’ existing joint venture
agreement. [*****]
Why Market Price of Clorox Stock
Was Not Used: Use of
the market price of Clorox stock on the transaction closing date
was not considered appropriate because it would
not have reflected a realistic fair value for the transaction and
could have potentially misled users of the financial statements by
overstating the fair value of the transaction and gain on
exchange.
Use of the market
price of Clorox stock at closing would have overstated the fair
value for the operating businesses and equity investment when
compared to sales and EBITDA multiples of similar market
transactions. Using the market price of Clorox stock of
$56.41 at closing would have implied a transaction value for the
operating businesses of [*****] after subtracting the
[*****] negotiated value for the investment in Henkel
Iberica. This would have translated to unrealistic sales and
EBITDA multiples of [*****] and [*****],
respectively, which exceeds any market transaction at that
time. See Exhibit B for a comparison of the negotiated fair
values for the operating businesses and equity investment, to value
ranges based on sales and earnings multiples and discounted cash
flow values.
Several other factors
demonstrate the market price of Clorox stock was not appropriate to
use to value the operating businesses and equity investment.
First, the market price on the transaction closing date reflected
an increase in value driven, in part, by Henkel’s
announcement of its intent to liquidate its investment in Clorox
nearly one year prior to the transaction closing date. In
December 2003, the month of Henkel’s announcement,
Clorox’s stock traded at $47-$49. [*****]
The Company also believes it would be inappropriate to use the
market price at closing as it was not the basis used to negotiate
the transaction. All negotiations were based on the $47-$49
share price around the date of Henkel’s announcement that it
may liquidate some or all of its holdings.
Second, because Henkel
was eager to dispose of a large block of Clorox shares, the Company
was able to negotiate a sizeable discount to acquire a large block
of stock from a motivated shareholder. If Henkel were to
dispose of its 29% block of Clorox shares in the open market, this
block would have taken time to clear the market, would have exerted
significant downward pressure on the stock price, and Henkel would
have incurred significant transaction costs in the form of
brokerage and other fees.
[*****]
*****The Company has submitted
this portion of the response letter separately because it requests
that such portion be kept confidential by the Staff pursuant to 17
C.F.R. section 200.83.
Authoritative Literature Guiding
the Accounting for the Henkel Share Exchange: The share exchange with Henkel was a
nonmonetary exchange. Guidance in accounting for
nonmonetary exchanges provided under APB Opinion No. 29 and EITF
01-02 prescribes that the “cost of a nonmonetary asset
acquired in exchange for another nonmonetary asset is the fair
value of the asset surrendered to obtain it, and a gain or loss
should be recognized on the exchange. Fair value of the asset
received can be used if it is more clearly evident than the fair
value of the asset surrendered.” Issue #12 in EITF
01-02 specifically provides that a tax-free split-off of a segment
of a business should be accounted for at fair value. In the
case of the share exchange with Henkel, the fair value of the
subsidiary shares given to Henkel was objective and
verifiable. More than 70% of the subsidiary value was derived
from cash held by the subsidiary. The remaining values were
derived from the fair values of the operating businesses and equity
investment which were negotiated at arm’s length and
supported by traditional
valuation methodologies, sales and EBITDA multiples
[*****].
Additionally, FASB
Technical Bulletin 85-6 acknowledges that transactions do arise in
which an acquisition of stock may take place at a price different
from routine transactions in the open market. Specifically,
“a large block of shares may trade at a price above or below
the current market price depending on whether the buyer or seller
initiates the transaction.”
Comment: Provide us with
the gain calculation and any corresponding supporting
schedules
Response: The gain was
calculated by subtracting the net book value of the subsidiary and
certain transaction fees from the negotiated value of
$2,839,126,041. Details of the gain calculation are provided
on Exhibit C.
* * * * * *
*
*****The Company has submitted
this portion of the response letter separately because it requests
that such portion be kept confidential by the Staff pursuant to 17
C.F.R. section 200.83.
In addition, in accordance with your
letter, the Company acknowledges that:
It is responsible for the adequacy
and accuracy of the disclosures in its filings;
It is the Commission’s
position that comments from the SEC staff or changes to disclosure
in response to staff comments do not foreclose the Commission from
taking any action with respect to the filing; and
It is the Commission’s
position that the Company may not assert staff comments as a
defense in any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
*******
Contact Information
If you have any questions or need
any additional information, please contact Tom Johnson at (510) 271
2873, John Kresich at (510) 271 3127 or me at (510) 271
7377.
Sincerely,
/s/ Daniel J. Heinrich
Daniel J. Heinrich
cc:
Laura
Stein
Senior Vice President--General Counsel
Thomas
Johnson
Vice President--Controller
John
Kresich
Vice President--Assistant Controller
Pamela
Fletcher
Vice President--Secretary
Nudrat
Salik
Securities and Exchange Commission
Ernst & Young
Exhibit
A
Selected
Acquisitions in the Home Products/Personal Care Industry as of
November 2004
Multiples
of
Announcement
Date
Target
Acquiror
Enterprise
Value ($MM)
Sales
Ebit
EBITDA
[*****]
May 2004
Armkel (50% Stake)
Church & Dwight
254
1.2
6.0x
5.0
Feb. 2004
Prestige Brands (Bonita
Bay)
GTCR
555
3.3
10.4
10.1
Feb. 2004
Spic and Span
GTCR
30
1.5
N.M.
N.M.
Jan. 2004
Medtech Products
GTCR
240
2.9
10.9
8.8
Dec. 2003
Dial
Henkel
2,977
2.2
12.9
11.1
Oct. 2003
Beiersdorf
Tchibo
12,215
2.2
16.6
N.A.
Sep. 2003
Unilever Oral Care Brands
Church & Dwight
104
0.8
N.A.
N.A.
Mar. 2003
Wella
Procter & Gamble
6,900
1.9
21.1
15.0
Jan. 2003
Schick-Wilkinson Sword
(Pfizer)
Energizer
930
1.4
12.7
8.7
Dec. 2002
Clear Eyes/Murine
Prestige Brands
108
2.4
N.A.
5.5
e
Nov. 2002
Bayer Household Insecticide
(Bayer)
S.C. Johnson & Sons
733
1.8
N.A.
N.A.
Aug. 2002
John Frieda
Kao
480
2.8
18.0
N.A.
Mar. 2002
Selsun Blue (Abbott)
Chattem
78
1.9
5.8
N.A.
Jan. 2002
Food Ingredients Specialties
(Nestle)
Givaudan
451
1.9
15.6
10.4
Dec. 2001
Paragon Trade Brands
Tyco International
650
1.2
22.4
9.3
Nov. 2001
DiverseyLever
Johnson Wax Professional
1,600
1.1
12.7
8.4
Oct. 2001
Comet (P&G)
Prestige Brands
142
1.8
N.A.
5.5
e
May 2001
Clairol (Bristol-Myers
Squibb)
Procter & Gamble
4,950
3.1
16.5
14.9
Apr. 2001
Consumer Products Division
(Carter-Wallace)
Church & Dwight/Kelso
739
1.5
N.A.
7.4
Mar. 2001
Oxy
Reckitt Benckiser
127
1.3
N.A.
N.A.
Mar. 2001
USA Detergents
Church & Dwight
130
0.5
N.M.
13.0
e = estimate
[*****]
*****The Company has submitted
this portion of the response letter separately because it requests
that such portion be kept confidential by the Staff pursuant to 17
C.F.R. section 200.83.
Exhibit
B
Henkel Share
Exchange
Negotiated Fair
Value Compared to Range of Values Based on Multiples of Similar
Transactions and Discounted Cash Flow
[The Company has
submitted this portion of the response letter separately because it
requests that such portion be kept confidential by the Staff
pursuant to 17 C.F.R. section 200.83.]
Exhibit
C
Gain on Exchange
[The Company has
submitted this portion of the response letter separately because it
requests that such portion be kept confidential by the Staff
pursuant to 17 C.F.R. section 200.83.]