Newell Brands certainly kicked off its rummage sale with a bang.
Just last week, the $25 billion maker of Sharpie markers, Coleman coolers and other consumer products detailed its plan to divest chunks of its portfolio following its acquisition of Jarden. Weeding out lower-margin businesses to pay down debt is a smart move, but it wasn't clear what kind of valuations the company would be able to get for its hand-me-downs.
Part of the answer came on Wednesday, when Newell said it would sell the bulk of its tools unit -- including the Irwin, Lenox and Hilmor brands -- to Stanley Black & Decker for $1.95 billion in cash.
The purchase price is nearly $900 million more than what Gabelli analyst Zamane Bodini had pegged as a reasonable valuation for the tools division last week. Stanley is paying about 2.6 times the unit's revenue over the last 12 months and an Ebitda multiple of about 13 times. There aren't many similar deals to compare those multiples too, but private equity firm Bain Capital paid closer to 1 time revenue when it acquired Apex Tool Group in 2013.
Shares of Newell rose as much as 2 percent in morning trading Wednesday as investors celebrated. The other divisions that Newell has earmarked for a sale -- its Volkl and K2 winter sports brands, Rubbermaid large consumer storage containers and its heaters, humidifiers and fans assets -- are likely less profitable than the tools business and won't command such rich valuations. But getting such a good deal on the biggest division up for sale gives management some cover and should show investors it's talking to the right kinds of buyers.
So what's in it for Stanley? For one, these brands are much more valuable in the hands of an experienced toolmaker than they are within a company that also makes Graco baby strollers and Yankee candles. Stanley's tools and storage business has been a bright spot lately as construction spending ticks up and consumers put more money to work on improving their homes. Expanding that business is a bet that those trends will continue.
While Newell has seen the net revenue it derives from its overall tool business decline recently amid challenges in Brazil, Stanley sees opportunities to "rev up organic growth" by plugging the brands into its operating system and much larger distribution routes. Stanley expects the deal to add about 15 cents to its earnings next year (excluding one-time costs) and to eventually result in as much as $90 million of cost savings.
Those synergies may be one reason Stanley decided to pay $2 billion for Newell's tool business as opposed to Sears's Craftsman brand, which was said to be seeking a similar price tag. Craftsman doesn't make its own tools, but rather outsources that work to manufacturers, limiting the potential cost savings from a takeover by Stanley, according to CLSA analyst Jeremie Capron.
The purchase of Newell's tool business will push Stanley's leverage toward 3 times Ebitda, compared with its targeted range of 2 to 2.3, according to Bloomberg Intelligence's Joel Levington. Asset sales could in theory give it more M&A firepower. CLSA's Capron speculated that a sale of Stanley's mechanical-security portfolio could be announced later this year, potentially providing the resources for a Craftsman buyout. But for now, it appears Stanley is out of the running for a Craftsman deal. Shareholders seem more than fine with its decision: The stock rose as much as 4.3 percent Wednesday morning.
That's not to say no one will buy Craftsman. There were a number of other buyers said to be interested, including Apex and Techtronic, which might be more logical anyway. But a dwindling number of competitors doesn't bode well for bidding wars. Sorry, Eddie Lampert.
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