Author Topic: SPG - Spectrum Brands  (Read 750 times)

walkie518

  • Full Member
  • ***
  • Posts: 238
SPG - Spectrum Brands
« on: October 13, 2018, 01:11:13 PM »
After seeing some recent interest in the LUK/JEF thread, I wanted a quick refresh on Spectrum after the HRG deal.

SPG has 53.4m shs out trading at $68/sh or $3.63B mcap

The battery and light division is set to be sold by year end for $2B.  It looks like gains are going to be largely sheltered by HRG's NOL (reminiscent of the old LUK playbook).

The remaining company should have about $3B of sales. 

Debt is fairly high at $5.1B, unless someone can correct me, it's unclear how much of the $2B goes to debt and buyback.  Last presentation shows EBITDA of $366m and Adj EBITDA at $602m--costs mostly due to the HRG deal along with some other one-off items.  While I don't tend to trust this kind of accounting, provided there is nothing hiding in a line item, the only item I would probably add back is the stock comp.

In a rising rate env, I'm not sure how they intend to lower cost of debt unless the goal is to shrink the debt load materially.  Currently, SPB is paying 7%.  Without changing cost of debt or bettering the business, this could yield a $140m improvement to the bottom line.

Further on this line of thinking, if it all goes to pay back debt and 2019 EBITDA looks like Adj EBITDA, we might see a CPG company generating $740m of EBITDA.  Pull out interest expense and comp, and we find a company generating close to $500m of owner's earnings trading at a $3.6B mcap.

Where am I going wrong here?  Did I miss something in between the filings and merger?


Broeb22

  • Jr. Member
  • **
  • Posts: 86
Re: SPG - Spectrum Brands
« Reply #1 on: October 13, 2018, 07:29:19 PM »
Youíre mostly correct. SPB plans to use the 3.7B proceeds from its GBA business plus internally generated cash to get to about 1x Net Debt to EBITDA. I was just doing the math today, and I believe pro forma SPB will generate 550 MM FCF when the after tax interest expense accrues to equity holders. I get to about a 15% FCF yield if David Maura can get the operational issues fixed that caused them to whiff on guidance this year.

I really like being in a business with very little debt, substantial cash generation, and a seasoned capital allocator at the helm who is prepared to either buy back stock or wait for acquisition multiples to come back to Earth.

walkie518

  • Full Member
  • ***
  • Posts: 238
Re: SPG - Spectrum Brands
« Reply #2 on: October 15, 2018, 04:25:06 PM »
Youíre mostly correct. SPB plans to use the 3.7B proceeds from its GBA business plus internally generated cash to get to about 1x Net Debt to EBITDA. I was just doing the math today, and I believe pro forma SPB will generate 550 MM FCF when the after tax interest expense accrues to equity holders. I get to about a 15% FCF yield if David Maura can get the operational issues fixed that caused them to whiff on guidance this year.

I really like being in a business with very little debt, substantial cash generation, and a seasoned capital allocator at the helm who is prepared to either buy back stock or wait for acquisition multiples to come back to Earth.
Do you know why 1x is the number?  Any idea what the plan might be at 1x?  That doesn't seem like a business they want to grow but to ...

Broeb22

  • Jr. Member
  • **
  • Posts: 86
Re: SPG - Spectrum Brands
« Reply #3 on: October 15, 2018, 06:48:52 PM »
Mauraís first conference calls is one of my favorite calls that Iíve heard any CEO give for a variety of reasons. Highly recommend.

In that call, he addresses the question of why he wants to get to 1x EBITDA. In short, he talks about how valuations are sky high today, so it is a better time to be selling than buying. He sounds sort of like a market timer, but I generally agree that there will be better values in the future. I imagine if the stock stays where it is today, he wonít be afraid to buy back a full 1x EBITDA, or about $700MM (about 20% of the equity). If heís generating $550 million a year in cash, he can probably buyback $500 million annually without losing sleep.

Unrelated, this episode kind of reminds me of the Bill Anders chapter in the Outsiders, when he sold off a big piece of the General Dynamics.

The other point I would note about SPB relative to other CPG companies is ownership. Look at EPCís DEF14A and then compare to SPBís. I chose EPC because they are similar size companies. EPCís biggest shareholders are Vanguard and Blackrock, who collectively own 24% of the company. SPB until recently had no major institutional holders above 5% because of HRG Groupís control.

walkie518

  • Full Member
  • ***
  • Posts: 238
Re: SPG - Spectrum Brands
« Reply #4 on: Today at 10:48:41 AM »
Mauraís first conference calls is one of my favorite calls that Iíve heard any CEO give for a variety of reasons. Highly recommend.

In that call, he addresses the question of why he wants to get to 1x EBITDA. In short, he talks about how valuations are sky high today, so it is a better time to be selling than buying. He sounds sort of like a market timer, but I generally agree that there will be better values in the future. I imagine if the stock stays where it is today, he wonít be afraid to buy back a full 1x EBITDA, or about $700MM (about 20% of the equity). If heís generating $550 million a year in cash, he can probably buyback $500 million annually without losing sleep.

Unrelated, this episode kind of reminds me of the Bill Anders chapter in the Outsiders, when he sold off a big piece of the General Dynamics.

The other point I would note about SPB relative to other CPG companies is ownership. Look at EPCís DEF14A and then compare to SPBís. I chose EPC because they are similar size companies. EPCís biggest shareholders are Vanguard and Blackrock, who collectively own 24% of the company. SPB until recently had no major institutional holders above 5% because of HRG Groupís control.

Your last point is very interesting. 

The $1B buyback is material considering it is to occur over a 3 yr period.  Typically, it's silly to time a buyback, but in this case and at these prices, it gives a lot of comfort. My guess is that they buyback before entering an index?

kab60

  • Hero Member
  • *****
  • Posts: 749
Re: SPG - Spectrum Brands
« Reply #5 on: Today at 11:28:11 AM »
Agree it looks interesting. Last two calls read like Outsiders/value porn. Couple of things.

Mr. Moura has been on HRGs board for ages. Why didn't he act before? Isn't he partly to blame for the mess? Is he aligned with shareholders?

How do you think of margins in a recession?

Will tariff war make appliances a tough sell?

Any risk battery sale doesn't go through?


Broeb22

  • Jr. Member
  • **
  • Posts: 86
Re: SPG - Spectrum Brands
« Reply #6 on: Today at 11:58:03 AM »
Agree it looks interesting. Last two calls read like Outsiders/value porn. Couple of things.

Mr. Moura has been on HRGs board for ages. Why didn't he act before? Isn't he partly to blame for the mess? Is he aligned with shareholders?
  Maura actually resigned from HRG on 12/1/2016, so close to 2 years ago. Technically yes he is to blame for some of this because he was Chairman during the last few years, but if you were Chairman of the Board, how involved would you be in underwriting distribution and production consolidation moves? I'm sure they were conversations, but what seems clear now is the prior CEO had bad info. Maura said on one of the recent calls he had to re-underwrite the distribution center changes they are doing, meaning the prior CEO really underestimated the costs. He owns about $20 million in stock, relative to total comp of $11 million, which included $9 million in stock awards in the most recent proxy.


How do you think of margins in a recession?
I honestly don't know. We really need to look product by product to understand how they respond. Most of their brands I would describe as more discretionary than most consumer staple companies. Still, if youre getting a low-teens FCF yield at peak margins, are you really gonna be upset if you only have a 10% FCF yield in a recession. Still WAY cheaper than almost anything out there.

Home and Garden - Spectracide and Hot Shot bug exterminator, Cutter insect repellent, etc. - Bug spray is pretty mandatory if you want to spend time outside in some regions, and depending on how allergic you are, bee/bug sprays are not exactly discretionary. But they are also just a nuisance, so not something I would be most worried about addressing if I just lost my job.
Companion Animal - Pet Grooming, Stain Removers, Fish Food/Cleaner - If you have a pet, there are probably ways to groom them without SPB's products, so could substitute to a more difficult grooming, stain removal, cleaning solution.
Global Auto - Armor All, etc. - Armor All products can probably easily be replaced with dish soap and water, so in a Depression-like scenario you could see sales fall here as people substitute away
Hardware & Home Improvement - Locks - This is tied to home sales transactions in some sense which would decline in a recession, and perhaps the level of restraining orders (which is arguably counter cyclical) :)



Will tariff war make appliances a tough sell?
I don't know if tariffs are causing appliances tough to sell, but I think given the silence they have clearly not received the interest they expected, so I personally haircut their stated $3.7BN gross proceeds.


Any risk battery sale doesn't go through?

I think its low. Hart-Scott-Rodino already happened in US, so now they are waiting on European approval. Europe seems to be generally less-pro M&A, but private label batteries have larger share in Europe relative to brands. I saw this analysis in a Merrill research report earlier this year, and my impression was branded market share (even pro-forma for acquisition should not worry regulatKwiksetors. But we'll have to see. Losing the battery sale would difficult to overcome because Energizer is maybe the only company other than Berkshire's Duracell brand which can extract enough synergies to justify the multiple ENR is paying.   


[/quote]