Do baby strollers belong in Margaritaville?
That's the sort of blending that's taking place as part of Newell Rubbermaid's $15.4 billion stock-and-cash purchase of fellow consumer product aggregator Jarden. The deal will combine brands as varied as Graco baby products, Sharpie pens, Yankee Candles and the mix for the aforementioned concoction with salt. Financially, the deal makes plenty of sense. Jarden shareholders are receiving an implied price of about $60 a share based on last week's prices, a higher value than the stock had ever reached on its own. But the price isn't so rich that it will prevent the deal from adding to earnings for Newell Rubbermaid's investors.
The strategic logic is less clear and left some scratching their heads when rumblings of a deal first emerged last week.
Sure, Jarden and Newell Rubbermaid are both sitting on buckets of brands that have something to do with consumers, but the companies are driven by different growth strategies. Whereas Newell Rubbermaid is focused on developing a stable of brands to eke synergies out of them, Jarden operates like a private equity firm, improving labels and letting them operate somewhat independently, notes Stephanie Wissink of Piper Jaffray. Putting aside how they acquired their brands, there isn't a ton of overlap between the two portfolios.
But then again, there isn't a ton of overlap in Newell Rubbermaid's own portfolio. What do Lenox tools have to do with Elmer's glue or Calphalon cookware? The Jarden takeover is just a bigger version of the deals Newell has been doing for years to expand its collection of consumer brands. So far, that strategy has largely been working. Newell Rubbermaid shares have more than doubled over the past five years, outpacing the S&P 500.
The company's largest takeover before Jarden was the $6 billion purchase of Rubbermaid in 1999 -- a deal that brought Rubbermaid food containers together with Goody hairties and drew its fair share of skeptics, too, in part because of the size and lofty price tag. But check out this quote from the Bloomberg News article when Newell announced the Rubbermaid deal:
``What they need is a company or management that's expert at cutting costs and increasing profitability -- and that's what Newell does best,'' said analyst Carol Warner at Prudential Securities.
Just substitute Jarden for Rubbermaid and you get the same idea. Synergies are the goal here. Jarden's trailing 12-month profit margin is about half that of its rival, while operating and gross margins also lag behind. Newell Rubbermaid CEO Mike Polk says he can squeeze out $500 million in cost savings within four years.
And while consumers may not need a Sharpie to complement their Margaritaville drink mix, chances are they buy them at the same place. Both Jarden and Newell Rubbermaid count Wal-Mart, Amazon and Target as top customers, according to data compiled by Bloomberg, and they buy some of the same raw materials. So add distribution and revenue synergies as well as better negotiating power with core goods suppliers to the list of potential benefits.
It's those kinds of things -- along with a stronger stream of free cash flow -- that should help Newell Rubbermaid pay down the admittedly large amount of debt it's taking on to finance the deal.
Investors expressed displeasure with the deal, sending Newell Rubbermaid shares down nearly 10 percent as of mid-morning in New York. Perhaps they should be giving the company more credit.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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