A Honey of a Deal

Business Overview:

Burt's is one of the leading brands in the growing $6.4 billion natural personal care ("NPC") segment. The company was co-founded in 1989 by Roxanne Quimby and is headquartered in Durham, North Carolina. With expected calendar 2007 net sales of approximately $170 million, the Company is best known for its Lip Care product line, which makes up 40% of the total and is growing at a double digit rate. Burt's also commands a #1 or #2 position (within the natural food channels) in four other categories: Foot Care, Kits and Gifts, Baby Care, and Other Skin Care. Facial and Body Care represent approximately 30% of sales and Infant Care, Kits and Gifts, Outdoor/Natural Remedies and Other make up the balance, approximately 30% of sales.

The Company’s products are positioned as simple, trusted and effective alternatives to synthetic, mainstream products, and are made with natural ingredients. Burt's formulations use fruits, vegetables, natural preservatives and botanical oils and are packaged in recycled and recyclable materials. The elements of the brand’s distinctive positioning have made Burt's one of the few natural personal care brands that appeal to a broad range of consumers beyond those in the natural products segment. These include: Burt's unconventional personality, innovative and efficacious products, diversified product line, strong sense of values, and highly-recognizable, bold, simple and eye-catching graphics and packaging. Burt's strong brand equity is also reflected in consumers' superior rating of the brand versus its competitors across all important criteria such as efficacy, quality, safety, and composition. Over the years, Burt's brand aided awareness has grown to competitive levels while well ahead of other natural players.

Over the past four years, Burt's has grown at a compound annual rate of over 30% and has expanded well beyond its original roots in health food and other natural products channels, reaching an all commodity value ("ACV") of 54% in food, drug and mass ("FDM") channels in the most recent twelve-month period (compared with 4% in 2002). See below for Burt’s expanding in-store presence in the traditional channels over the last three years.

Strategic Rationale:

On the investor conference call Clorox management made it very clear that their overriding strategic objective was to accelerate top line growth. Clorox recognizes that the convergence of consumer mega-trends toward sustainability and health and wellness will provide a favorable growth "tail wind". In addition, natural personal care represents an economically attractive category in light of its scale ($6.4 billion), expected growth rate (7.7% projected annual growth), low household penetration (12%) and high fragmentation (top five players represent less than 20% of the total market). Thus, the acquisition provides the opportunity to acquire a "scale" brand, with leading market positions, in a category not dominated by other large consumer package goods companies. Furthermore, Clorox plans to use Burt’s as a platform for expansion into other personal care and health and wellness segments.

For Clorox, the acquisition also represents a move toward higher margin and higher growth consumer categories. Burt’s EBITDA margin is estimated to be greater than 30%, compared with Clorox’s 22% EBITDA margin. While Burt’s $170 million in sales will only represent 3.4% of Clorox’s nearly $5 billion in 2007 sales, Clorox management has indicated that it expects the acquisition will drive an additional 2 percentage points of growth on top of Clorox's organic growth rate of 4-5%. Clorox envisions multiple pathways to sustain long-term growth through US distribution upside, international expansion, and extending the brand into new categories. Significant distribution upside exists in FDM channels, where Clorox’s 100% ACV compares to Burt’s 60% ACV. Clorox expects to be able to leverage its deep distribution relationships with FDM channels to increase Burt’s shelf presence and continue to drive growth. In addition, the Burt’s Bees brand is eminently extendable into other categories, as consumers view it to be the "most natural" personal care brand (according to a Clorox-commissioned survey). Overall, the transaction allows Clorox to acquire an authentic and competitively advantaged brand with unique formulation and manufacturing capabilities, a strong consumer franchise, top-tier profitability, and an experienced and credible management team.

M&A Considerations:

Burt’s was acquired by AEA Investors ("AEA") in November 2003 for an estimated $175 million. At the time, Burt’s had sales of approximately $55 million and a reported EBITDA of approximately $20 million. As such, the transaction multiples paid by AEA were 3.2x net sales and almost 9x EBITDA. These were perceived as high at the time.

Clorox acquired Burt’s Bees in a competitive process. Our intelligence indicates that about 10 strategic entities were approached about the opportunity. A number of leading personal care and cosmetics players did not pursue the transaction. In addition to Clorox, we believe that SC Johnson, Colgate and Unilever participated in the process. Industry sources indicate that SC Johnson was Clorox's key competitor in the final stages with a final offer that was meaningfully lower than the price paid by Clorox.

The transaction multiples paid by Clorox are at the very high end of comparable multiples paid in similar leading branded personal care transactions as shown in the chart below.

Analysts’ Reaction:

Sources:
Company filings, equity research, Company press releases, Company investor presentations, CapitalIQ, Euromonitor, Datamonitor, Nutrition Business Journal, The Deal, IRI Food, Drug and Mass ("FDM")x 52-weeks ending October 7, 2007