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Leggett Wraps Up Elite Comfort Acquisition for $1.25 Billion

Zacks Equity Research

Leggett & Platt, Inc. LEG has reportedly concluded the acquisition of Elite Comfort Solutions, Inc. (“ECS”) for $1.25 billion. Both the companies signed the agreement on Nov 7, 2018. Moving ahead, ECS will serve as a separate business unit and operate within Leggett’s Residential Products segment.

This all-cash transaction was financed through the expansion of the company's commercial paper program and the issuance of a $500 million five-year term loan with its present bank group.

Buyout Synergies

With a vertically integrated model and 16 facilities across the United States, ECS is a leader in proprietary specialized foam technology, primarily for the bedding and furniture industries. Its products include finished mattresses sold through both traditional and online channels, mattress components, mattress toppers and pillows, as well as furniture foams.

With this acquisition, Leggett is expected to benefit from critical capabilities in proprietary foam technology, along with scale in the production of private-label finished mattresses. The combined entity will be a leading provider of differentiated products for the bedding industry worldwide. This will help the company to reap benefits from current market trends that include growth of hybrid spring and specialty foam mattresses, improvement of the e-commerce mattress channel, higher demand for compressed mattresses (both online and retail channels), along with the emergence of numerous compressed mattress brands.

As revealed in November 2018, the combined entity is expected to generate cash flow from operations of about $550 million for 2019. Separately, ECS is projected to deliver double-digit sales growth and strong EBITDA margins this year. However, EBIT margins are likely to be negatively impacted due to purchase accounting. Also, Leggett anticipates net interest expense to be approximately $90 million, fully diluted shares of $136 million and a tax rate of about 23%.

Considering the above-mentioned factors, the acquisition is expected to be neutral to EPS in 2019. Nevertheless, the company expects this acquisition to be accretive to EPS beginning in 2020.

Leggett has always maintained a disciplined capital allocation strategy as well as remained focused on making investments to develop business, while using excess cash to enhance shareholder returns through dividend payouts and share buybacks. Notably, acquisitions contributed around 2% in each of the past three quarters of 2018.

Shares of Leggett have gained 5.2% over the past month, almost on par with the Zacks Furniture industry’s 5.5% growth.


Zacks Rank & Key Picks

Currently, Leggett carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Consumer Discretionary sector are La-Z-Boy Incorporated LZB, Laureate Education, Inc. LAUR and Universal Technical Institute, Inc. UTI. While La-Z-Boy and Laureate Education currently sport a Zacks Rank #1 (Strong Buy), Universal Technical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

La-Z-Boy surpassed earnings estimates in all the trailing four quarters, with the average positive surprise being 17.7%.

Laureate Education surpassed earnings estimates in three of the trailing four quarters, with the average positive surprise being 14.4%.

Universal Technical’s earnings are expected to grow 57.6% this year.

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