Stanley Black & Decker (NYSE:SWK) wants to be involved with businesses with global reach, as well as find a happy medium between consumer, construction and industrial market exposures. Spectrum Brands (NYSE:SPB) wants quality brands that can offset competition from Procter & Gamble (NYSE:PG) and Energizer (NYSE:ENR), while also producing good cash flow. These two wants came together on Tuesday morning with the announcement that Spectrum Brands is buying the Hardware and Home Improvement (HHI) business of Stanley Black & Decker for $1.4 billion in cash.
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A Straightforward Deal
The deal between these two companies is pretty simple and straightforward. Spectrum will pay SWK $1.4 billion in cash, which it will raise from a new term loan and unsecured notes. Investment banks Deutsche Bank (NYSE:DB) and Barclays (NYSE:BCS) will backstop the financing. For Stanley Black & Decker's part, the deal will be largely tax-efficient ($1.3 billion in after-tax proceeds). The proceeds will go towards share repurchases (more than 50%), debt reduction and funding the acquisition of Infastech - a large Hong Kong-based manufacturer of mechanical fasteners.
What Spectrum Is Getting
In HHI, Spectrum is buying an amalgamation of businesses. This deal includes the residential lockset businesses (Kwikset and Baldwin), the builders' hardware business and the plumbing fixtures business (Pfister) - all of which hold respectable share in their markets. While the batteries business (Rayovac) will still be highly significant to Spectrum after this deal, it further diversifies a company that already holds well-known brands like Remington, Faberware, Toastmaster and Black Flag, as it will be about one-quarter of the company's sales base.
Speaking of sales, HHI generated nearly $1 billion in revenue for the year ended June 30, and EBITDA of nearly $190 million. That means Spectrum is paying about 1.5 times sales and 7.5 times EBITDA - not bad when compared to the likes of Masco (NYSE:MAS) and Fortune Brands Home & Security (NYSE:FBHS). While those two rivals do trade at higher EBTIDA multiples, those stocks have rebounded strongly over the past year and their EBTIDA margins are considerably lower.
SEE: EBITDA: Challenging The Calculation
Reasonable for Both Parties
This pretty much looks like a win-win deal for both Spectrum and Stanley Black & Decker. As I mentioned, Spectrum is further diversifying its business and adding quality brands with strong market positions. These are also businesses that produce solid cash flow, so while the deal means Spectrum's focus on improving its balance sheet has to wait a bit, the deal will pay for itself over a relatively short period of time.
For Stanley Black & Decker, this deal furthers the company's efforts to exit businesses it sees as outside of its core focus. HHI is North America-centric (about 85-90% of sales) at a time when the company wants to be a global player. What's more, it reduces the company's exposure to big-box retailers like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) while also re-weighting the company's end market exposures (increasing the significance of industrial businesses).
The Bottom Line
I've liked Stanley Black & Decker for a while now, though with the stock up around 4% this year (versus about 13% for the S&P 500) it hasn't been my best call. Although I do believe there are some risks to this shift in strategy for Stanley Black & Decker, the long-term benefits seem worth those risks. Accordingly, I would still keep this one at least on a watch list. As for Spectrum Brands, this was an opportunistic deal at a solid price. The stock has already been very strong this year (up nearly 62%) and this deal announcement sent it up another 10%. While the stock is not my top choice at the moment, it's hard not to like a company with a stable of well-known consumer brands and a willingness to be prudently aggressive when good opportunities spring up.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.