Stanley Black & Decker Buys U.S. Housing Insulation: Real M&A

Stanley Black & Decker Buys U.S. Housing Insulation
Stanley Black & Decker, known for its DeWalt power tools, got more than half of its revenue last year from construction and do-it-yourself home improvement equipment, 25 percent from its security unit and the rest from industrial tools, such as wrenches used by auto mechanics. Photographer: Steve Hockstein/Bloomberg

Stanley Black & Decker Inc. is making the largest bet since its merger by joining the biggest wave of security-services takeovers in history as a safeguard against the U.S. housing market.

Stanley Black & Decker agreed to buy Sweden’s Niscayah Group AB for 7.6 billion kronor ($1.2 billion) yesterday, its largest deal excluding Stanley Works’s $4.4 billion purchase of Black & Decker Corp. announced in 2009 combining the two biggest U.S. toolmakers. Stanley Black & Decker’s offer of 13.9 times earnings before interest, taxes, depreciation and amortization to outbid Securitas AB tops the 10.8 multiple for its Black & Decker merger and any valuation that Stanley Works or Black & Decker previously paid, according to data compiled by Bloomberg.

The New Britain, Connecticut-based maker of cordless power drills and Bostitch nail guns is boosting sales of video surveillance and fire alarm systems in Europe by spending cash held overseas to lessen its dependence on a U.S. housing market that has lagged behind the rest of the economy. Stanley Black & Decker isn’t alone. There have been $5.6 billion in security services takeovers announced already in 2011, more than any other full year, data compiled by Bloomberg show.

“The reason they are trying to insulate themselves from the housing business is because they’re skeptical of the rebound,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “With the consumer still on the ropes, I am sure they are looking for a way to add stability to their income statement. Security services is a relatively stable, repeat business.”

‘Footprint in Europe’

Tim Perra, a spokesman for Stanley Black & Decker, declined to comment and referred to the company’s conference call yesterday. Chief Operating Officer James Loree said on the call that the transaction is “consistent with a strategy that we’ve been discussing for several years now, which is to expand our electronic security footprint in Europe.”

Johan Andersson Melbi, a spokesman for Stockholm-based Niscayah, declined to comment.

Stanley Black & Decker, known for its DeWalt power tools, got more than half of its revenue last year from construction and do-it-yourself home improvement equipment, 25 percent from its security unit and the rest from industrial tools, such as wrenches used by auto mechanics. With 55 percent of $8.4 billion in sales generated in the U.S., according to regulatory filings, the company is trying to increase its presence in Europe by acquiring Niscayah.

U.S. Recession

The recovery in the housing market and employment gains that help fuel home sales remain sluggish even after the longest U.S. recession since the Great Depression ended in June 2009.

Purchases of new U.S. houses fell 2.1 percent to an annual pace of 319,000 in May, data from the Commerce Department showed last week. The unemployment rate was 9.1 percent last month, 1 percentage point less than the 26-year high of 10.1 percent in October 2009, according to the Labor Department.

“If you take a look at the combination of Stanley and Black & Decker last year, that opened up the company to more exposure to the home repair and remodeling segment that is a lot more volatile,” said Robert Rulla, a debt analyst with Fitch Ratings in Chicago. “The addition of this at least provides them with a lot more diversity in terms of both geography and end market.”

Trumping Securitas

Niscayah, which was spun off in 2006 from Stockholm-based Securitas, installs and services security systems for banks and retailers. The business brought in about $922 million in revenue in 2010, most of which was in continental Europe.

Stanley Black & Decker’s cash offer for Niscayah, which is endorsed by the target’s independent board members and already supported by shareholders owning 19.5 percent of the stock, trumped a $1.1 billion stock bid including net debt from Securitas, which was aiming to reclaim the company.

“If they want to be a bigger player in the security market, when these sizeable assets become available, which is rare, you have to jump on that,” said Nicole DeBlase, an analyst at Deutsche Bank AG in New York, who added that the industry is fragmented by “mom-and-pop” businesses.

The deal is being financed from almost $2 billion in cash overseas to make use of “unproductive” capital “trapped” outside the U.S., COO Loree said on the conference call. If Stanley Black & Decker were to repatriate the cash, which currently earns about 50 basis points in interest, it would incur taxes of as much as 30 percent, Chief Financial Officer Donald Allan Jr. said on the call. A basis point is 0.01 percentage point.

‘Incredible Strategic Relevance’

Although Stanley Black & Decker stated in a March 3 investor presentation that acquisitions were “not likely to exceed” $500 million to $700 million in total this year, the company decided on the $1.2 billion deal because of its “incredible strategic relevance and attractiveness,” COO Loree said on the call yesterday.

The takeover, including Niscayah’s $163 million in net debt, values the company at 13.9 times Ebitda in the last 12 months, the highest multiple paid for a publicly traded securities services firm since 2007, the data show.

“Despite the potential for earnings accretion right out of the gate, the stock didn’t hop on this news because of integration risk,” said Brian Sozzi, an analyst at Wall Street Strategies in New York. “Black & Decker was a big company to swallow. They still have many pieces to go before they realize significant value from that transaction.”

Record Deal Volume

Stanley Black & Decker added 0.3 percent to $69.50 yesterday, compared with a 10 percent jump for Stanley Works when it said in November 2009 it would combine with Black & Decker, a deal valued at $5.4 billion when it closed in March 2010. The shares had risen 54 percent since the announcement through yesterday, outpacing a 23 percent gain for the Standard & Poor’s 500 Index.

Stanley Black & Decker gained 9 cents, or 0.1 percent, to $69.59 today in New York.

The $5.6 billion of pending and completed security-services takeovers announced so far in 2011 outstrips the deal volume in every full year, according to data compiled by Bloomberg going back to 1999. The previous record was $3.7 billion in 2004.

While Stanley Black & Decker announced the acquisition of Niscayah yesterday, the company had been vying for Securitas Direct AB, which ended up being the biggest industry takeover, data compiled by Bloomberg show. Buyout firm EQT Partners AB sold Securitas Direct, the Malmoe, Sweden-based burglar alarm company spun off from Securitas AB in 2006, to Bain Capital LLC and Hellman & Friedman LLC for $3.2 billion last week.

Largest Guarding Company

Stanley Black & Decker was among companies that EQT and Morgan Stanley were trying to lure offers from when the unit was put up for sale in March, two people with knowledge of the matter, who declined to be identified because the talks were private, said at the time.

Securitas, the world’s largest guarding company, made an unsolicited all-stock offer on May 16 valuing Niscayah at about 6.14 billion kronor plus 1.03 billion kronor in net debt, or about $1.1 billion in total. It’s now worth 14.8 kronor a share.

Niscayah closed yesterday at 18.20 kronor, higher than Stanley Black & Decker’s offer of 18 kronor per share, signaling some traders were betting on a sweetened proposal. The shares rose 0.6 percent to 18.30 kronor today in Stockholm.

“Our bid stands and we’re not going to enter a negotiation process with another rivaling bid,” Gisela Lindstrand, a spokeswoman for Securitas, said yesterday. “We have bid 16 kronor per share and that’s what we think Niscayah is worth for us. You never know what will happen with these things. We still have the ambition to acquire Niscayah.”

Niscayah is attractive to Securitas because most security contracts involve both guards and technical services and Securitas now provides the technology aspects through external providers such as Niscayah, Lindstrand said.

“From Stanley Black & Decker’s standpoint, it would provide a revenue source that isn’t as dependent on economic growth,” said Stewart’s Polley. “You don’t make much money on the installations; you make your money on servicing. Once in place, it is sticky business that doesn’t migrate away.”


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