Edgewell's deal to buy shaving startup Harry's sinks shares on debt concerns

(Reuters) - Schick and Wilkinson razor brands owner Edgewell Personal Care Co said on Thursday it would buy shaving startup Harry’s Inc in a $1.37 billion cash-and-stock deal, but its shares plunged 17 percent as the high levels of debt spooked investors.

Edgewell is the latest U.S. grooming company to buy startups to capitalize on such firms’ strong online presence and attract a new set of customers.

But such deals have not come cheap. Unilever reportedly paid five times annual sales for Dollar Shave Club in 2016.

While Edgewell is paying only four times revenue, the combined company will have gross debt of 5.2x earnings before interest, taxes, depreciation and amortization (EBITDA) when the deal closes.

Edgewell currently has a total debt of about $1 billion, which Consumer Edge analyst Jonathan Feeney said would double once the deal closes.

Gillette-owner Procter & Gamble and Unilever both have total debt of around twice their EBITDA.

UBS analyst Steven Strycula said while the deal made strategic sense in terms of growing Edgewell’s distribution and getting a direct-to-consumer expertise, it came with some risks.

“The pro-forma company carries in excess of 5x leverage and competes head-to-head with a stronger P&G - who is determined to return Gillette to sustainable growth,” Strycula said in a note.

Edgewell, which also reported lower-than-expected second-quarter revenue and a near 9 percent decline in organic sales, expects Harry’s to bring in $325 million in net sales and breakeven on EBITDA basis this year.

The company is in the process of exploring alternatives, including the sale of its feminine care and infant care businesses, and the current debt estimates exclude proceeds from any potential divestiture.

New York-based Harry’s sells razors, shaving creams, lotions, soaps and other grooming products, embossed with its quirky hairy elephant logo, as well as Flamingo line of women’s razors and waxes over the internet and also in Walmart Inc and Target Corp stores.

Edgewell said Harry’s founders Andy Katz-Mayfield and Jeff Raider will join its executive team as co-presidents of the company’s U.S. operations.

The company will pay 79 percent of the deal value in cash and the rest in stock, giving Harry’s shareholders an 11 percent stake in the combined company upon completion of the deal, expected by the end of first quarter of 2020.

Edgewell’s shares were trading down about 13 percent at $34.81, on pace to erase all its year-to-date gains.

Reporting by Syed Saif Hussain Naqvi and Soundarya J in Bengaluru; Editing by Shounak Dasgupta and Sriraj Kalluvila