Deal Overview
On July 2, 2024, Spectrum Brands Holdings Inc. (NYSE: SPB, $85.00; Market Capitalization: $2.5 billion) announced a plan to spin-off its Home & Personal care (“HPC”) business. After separation, Spectrum (Stub Co.) will continue focusing on its pure-play Pet, and Home & Garden businesses, which include renowned brands such as Tetra, FURminator, DreamBone, Garden Safe, EcoLogic, Real-Kill, etc. On the other hand, the HPC business (NewCo.) will emerge as a standalone platform catering to everyday household needs, with a focus on personal care appliances, shaving & grooming products, batteries, and some specialty items through brands such as Remington, George Foreman, Russell Hobbs etc.
Previously, Spectrum Brands had accelerated its efforts to separate the HPC business from its other operations due to a more favorable outlook. The management was contemplating a spin-off, sale, merger, or other strategic transaction for separation. Accordingly, on July 2, 2024, the company has filed a confidential Form 10 registration statement with the U.S. Securities and Exchange Commission (“SEC”) representing an important step forward in this process. However, the firm reiterated that the filing does not obligate them to complete the spin-off or any other transaction.
The company has not disclosed any planned timeline to complete the spin-off. The process is contingent on various conditions, including final approval from its Board of Directors and the effectiveness of a Form-10 registration statement filed with the SEC.
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Deal Rationale
Spectrum Brands is a home essentials company that offers lifestyle products designed to improve everyday life at home. Their range includes items for meal preparation, personal care, pet care, home cleaning, and pest control. Over the years, it has been able to build a long legacy of products and develop trusted brands such as FURminator, DreamBone, Russell Hobbs, Tetra, GloFish, Remington, Cutter, and Spectracide. These brands hold strong positions in their respective markets, offering stability and customer loyalty. However, it is currently facing a challenge around stagnant or declining sales. For FY23 and 1H24, the company reported a net sales decline of 6.8% YoY and 2.2% YoY respectively. The decline was primarily due to reduced sales in specific categories including home appliances, lower volumes in Aquatics (pet care) products in North America, and the impact of SKU rationalizations (reducing the number of product variations offered). Following this, Spectrum Brands’ decision to separate its Home & Personal Care (HPC) business likely stems from a combination of strategic and financial factors.
According to the management, separating the HPC business would allow Spectrum Brands to have more focused management attention and resources to its remaining core businesses like Global Pet Care, and Home & Garden. This could lead to improved strategic planning, innovation, and marketing efforts tailored to each segment’s specific needs. Management also acknowledged that the stock continues to be undervalued and is partially because of HPC being embedded in the holding company. This is why it continues to buy back shares (12.1 million shares repurchased in Dec 2023, 29.5% reduction), shrink its float, and dedicate efforts to grow its earnings.
Separating the HPC business might also create more transparency for investors. Each business unit could be valued independently, potentially leading to an efficient valuation of each business. Investors focused on HPC might be more attracted to a standalone entity. Hence, the company believes that separation is the best way to allow each business to pursue its investor base, and capital allocation strategy, and grow as separate businesses with separate strategic focuses.
Home & Personal Care
The Home & Personal Care (HPC) segment offers a diverse brand portfolio catering to various home appliances (63.0% of FY23 HPC net sales) and personal care needs (37.0%). The home appliances segment includes small kitchen appliances including toaster ovens, coffeemakers, slow cookers, air fryers, blenders, hand mixers, grills, food processors, juicers, toasters, irons, kettles, bread makers, cookware, and cookbooks. Personal care includes hair dryers, flat irons and straighteners, rotary and foil electric shavers, personal groomers, mustache and beard trimmers, body groomers, nose and ear trimmers, women’s shavers, and haircut kits. The segment boasts of well-recognized brands like Rayovac (a global leader in batteries) and Remington (an established brand in shaving & grooming). HPC products are sold primarily to large retailers, online retailers, wholesalers, distributors, warehouse clubs, food and drug chains and specialty trade or retail outlets such as consumer electronics stores, department stores, discounters and other specialty stores. HPC products are also sold directto- consumer through direct response television, brand websites, and other online marketplaces. A significant percentage of the sales are attributable to a limited group of retailer customers, including Walmart and Amazon, which represent approximately 37.1% of segment sales for FY23.
Global Pet Care
The Global Pet Care (GPC) segment provides a diverse range of pet products in the Companion Animal category (76.0% of GPC FY23 net sales), including dog and cat chews, treats, wet and dry foods, grooming supplies, training aids, and health products. It also caters to the Aquatics category (24.0%) through Consumer and commercial aquarium kits, stand-alone tanks; aquatics equipment such as filtration systems, heaters and pumps; and aquatics consumables such as fish food, water management and care. It primarily sells to large retailers, pet superstores, online retailers, food and drug chains, warehouse clubs and other specialty retail outlets. A significant percentage of its sales are attributable to a limited group of retailer customers, including Walmart and Amazon, which represented approximately 33.4% of segment sales for FY23. This division contributed to 39.0% of net sales for FY23.
Home & Garden
Home & Garden (H&G) segment focuses on providing a range of products for household pest control, lawn & garden care, and home cleaning. In terms of product categories, Household (31.0% of H&G FY23 net sales) includes pest control solutions such as spider and scorpion killers, ant and roach killers, flying insect killers, insect foggers, wasp and hornet killers, and bedbug, flea and tick control products. Controls category (43.0%) caters to outdoor insect and weed control solutions, and animal repellents such as aerosols, granules, and readyto- use sprays or hose-end ready-to-sprays. Repellents (20.0%) include personal use pesticides and insect repellent products, including aerosols, lotions, pump sprays and wipes, yard sprays and citronella candles. The cleaning category (6.0%) includes products for household surface cleaning, maintenance, and restoration products, including bottled liquids, mops, wipes, and markers. A significant percentage of the sales are attributable to a limited group of retailer customers, including Lowe’s, Home Depot, and Walmart, which represent approximately 63.1% of segment sales for FY23.
2Q24
Total revenues fell 1.5% YoY to $719 million (-1.6% Organically; +1.4% vs. Consensus) due to a decline in North American small kitchen appliances. Global Pet Care division’s revenue decreased 2.3% YoY to $290 million, led by softness in the North America Aquatics category and exit from non-strategic categories and SKU rationalization. Home & Personal Care revenue decreased 4.0% YoY to $268 million, driven by global decline in Home Appliances, most notably in North America partially offset by growth in Personal Care, and partially offset by Home & Garden segment revenue increased 4.8% YoY to $161 million, aided by favorable weather trends and POS in key regions, offset by sales decline in household insect controls and repellents and softness in cleaning category.
Operating profit came in at $75.9 million (2Q23 loss of: $77.0 million), and corresponding margins came at 10.6%. Adjusted EBITDA grew exponentially to $112 million (2Q23: $51.0 million), and corresponding margins expanded by ~860bps to 15.6%. Net income from continuing operations came in at $49.9 million (2Q23 loss of: $75.0 million), corresponding margins came in at 6.9%. Adjusted diluted earnings per share came in at $1.62 (2Q23 loss per share of: $0.14), beating the consensus by 145.5%.
FY23
Total revenues fell 6.8% YoY to $2.9 billion (-8.1% Organically; +0.2% vs. Consensus) because of the challenging macro-economic environment due to post pandemic consumer demand decline, retailer inventory strategies and inflation hangover on prior year inventory. Home & Personal Care revenue decreased 9.3% YoY to $1.2 billion, led by decline from lower consumer demand, mainly in kitchen appliances. Global Pet Care division’s revenue decreased 3.1% YoY to $1.1 million, due to reduction in aquatics sales, higher retail inventory levels earlier in the year leading to lower replenishment sales. Home & Garden segment revenue decreased 8.6% YoY to $537 million, due to adverse weather conditions leading to lower POS and replenishment orders which also drove retailers to be conservative with inventory planning.
Operating loss came in at $206 million (FY22 profit of: $23.2 million). Adjusted EBITDA grew 7.0% YoY to $303 million, and corresponding margins expanded by ~134bps to 10.4%. Net loss from continuing operations came in at $234 million (FY22: $77.0 million). Adjusted diluted earnings per share came in at $1.53 (FY22: $1.36), beating the consensus by 18.7%.
Company Description
Spectrum Brands Holdings, Inc. (Parent)
Incorporated in 2009, Spectrum Brands Holdings, Inc. specializes in a wide range of global branded consumer products and essential home goods. The company is a supplier of specialty pet supplies, lawn and garden and home pest control products, personal insect repellents, shaving and grooming products, personal care products, and small household appliances. The company manage the business in three segments: Global Pet Care, Home & Garden and Home & Personal Care. It manufactures and distributes its products globally in North America, Europe, Middle East & Africa, Latin America, and Asia-Pacific regions and, as of September 30, 2023 the company has ~3,100 employees across the globe.
Home & Personal Care Company (Spin-Off)
The Home & Personal Care Company will offer a diverse range of brands that cater to various home appliance and personal care needs. The Home Appliances segment would include products like electric small kitchen appliances, cookware as well as cookbooks. The Personal Care division would include products like electric personal care products as well as haircut kits. These products are primarily sold to large retailers, online retailers, wholesalers, distributors, warehouse clubs, food and drug chains, as well as specialty trade or retail outlets.
