The $1.4 billion marriage of Harry’s, one of the nation’s most innovative shaving brands, and Edgewell Personal Care, owner of some of the world’s largest, legacy shaving brands, including Schick, Wilkinson, Edge, and Skintimate, has turned acrimonious, with Edgewell leaving Harry’s at the altar following the Federal Trade Commission (FTC) filing suit to block the deal earlier this month. And, just like any breakup where one party wants to stay in the relationship and the other wants to “just be friends,” feelings have been hurt and, in this case, legal action has been threatened—during Valentine’s week, no less.

The outcome of this situation says a lot about the longtime duopoly that has dominated the US shaving market, with Edgewell and Gillette owner, Procter & Gamble, dominating the landscape for years. It points to just how disruptive Harry’s has been to this duopoly and the effects the FTC perceives it has had on innovation and pricing in the marketplace. In its complaint, the FTC alleges that Edgewell and Procter & Gamble have enjoyed “a comfortable duopoly characterized by annual price increases that were not driven by changes in costs or demand.” It also highlights the perils of building a venture-backed business where the most likely opportunities for exit are with the very companies you’ve just disrupted.

At this point, we have more questions than answers, but we’ve analyzed the situation and broken it down for you to assess the impact this deal debacle will have on Harry’s and Edgewell, on their stakeholders, and on consumers.

But first, just the facts:

In May 2019, Edgewell Personal Care, owner of the Schick and Wilkinson razor brands, announced it had entered into a deal to acquire Harry’s for $1.37 billion in stock and cash. The deal hit a snag earlier this month, on February 3, when the FTC announced it had authorized its staff at the Bureau of Competition to file suit against the merger, alleging that the proposed combination would eliminate one of the most important competitive forces in the shaving industry. The FTC said, “The loss of Harry’s as an independent competitor would remove a critical disruptive rival that has driven down prices and spurred innovation in an industry that was previously dominated by two main suppliers, one of whom is the acquirer.”

On February 10, Edgewell announced that, following the FTC’s decision seeking to block the combination with Harry’s, it had decided to terminate its merger with Harry’s and pursue a “standalone value creation strategy.” Rod Little, Edgewell’s President and Chief Executive Officer, said that “after extensive consideration and discussion, and given the inherent uncertainty of a potential trial, the required investment of resources and time and the distraction that a continuing court battle would entail, we determined that proceeding with our standalone strategy is the best course of action for Edgewell and our shareholders.” In the same announcement, Edgewell noted that Harry’s had informed the company that it intended to pursue litigation. Harry’s said it was “perplexed by the FTC’s process and disregard of the facts” and believed it would have prevailed in litigation. Although Harry’s wouldn’t comment on its case against Edgewell, the company said it was “disappointed by the decision by Edgewell’s board not to see the process to conclusion.”

Shares of Edgewell jumped more than 25% after announcing its decision regarding Harry’s and releasing its quarterly earnings.

BeautyMatter Analysis:

Our quick take on the Edgewell Harry’s deal when it was announced in May of 2019 was that it was a compelling combination for both parties. In partnering with a strategic acquirer like Edgewell, Harry’s got a premium valuation (well deserved, in our opinion, given how disruptive the brand has been in the industry), which Edgewell could afford to pay given how synergistic the combination could potentially be. At the time the deal was announced, CNBC reported that the companies expected to generate synergies that would positively impact EBITDA (earnings before interest, taxes, depreciation and amortization, a commonly used profitability metric) by $20 million by 2023. Edgewell shareholders would not only benefit from a slight accretion to earnings, but also because Harry’s would give them an A+ asset that speaks to an audience that is highly complementary to the company’s existing customer base.

Given the FTC’s stance on this deal, it’s unlikely that an acquirer with the same ability to generate synergies (and thereby justify the valuation) as Edgewell will emerge to put a ring on Harry’s finger. This will definitely put pressure on the market value of the Harry’s brand from an M&A perspective. What’s more, given the rising cost of customer acquisition and the assumption that Harry’s is likely a breakeven business at best (CNBC reported that Edgewell executives told investors when the deal was announced that Harry’s was “generally” breakeven in 2019), it will likely be difficult for Harry’s to pursue liquidity in the public markets (just look at the recent market experiences of Casper and WeWork). Given the lack of a clear path to exit, finding a financial investor might be difficult as well.

So, where does this leave Harry’s, Edgewell, and the consumer? As of press time, the market seems to be rewarding Edgewell for walking away from potentially lengthy, expensive, and uncertain litigation with the FTC over the Harry’s deal. Edgewell’s stock price was up over 25%. Longer-term, though, Edgewell’s shareholders miss out on the opportunity to own a modern, forward-thinking shaving brand and the contributions of Harry’s founders, Jeff Raider and Andy Katz-Mayfield, who were expected to join Edgewell as co-Presidents of US Operations. As for Harry’s, if the foreseeable future requires the company to “go it alone” as one of shaving’s most eligible bachelors, they will likely need to cut some costs to drive profitability and give them the cash they’ll need for growth. From the perspective of the consumer, they’ll likely continue to enjoy an ever-expanding portfolio of great products from Harry’s and the price disruption the company has brought to the shaving marketplace. On the downside, we could start to see DTC brands, in general, avoiding expansion into wholesale channels (like Harry’s expansion into places like Target, Walmart, and Wegmans), where they’ll more effectively establish themselves as direct competitors to legacy players and create an FTC issue down the road if one of those players becomes an acquirer. We might also start to see disruptive upstarts selling out earlier in the brand’s lifecycle to avoid the FTC’s radar altogether.

And, just to throw another twist into this story, depending on how the elections shape up in November, there’s the potential for a wholesale changeover at the FTC and a glimmer of hope that Harry’s and Edgewell could get back together in 2021. If that happens, despite the lawsuit, maybe everyone will get to live happily ever after!