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Spectrum Brands (SPB) to Divest HHI to Focus on Core Units

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Shares of Spectrum Brands Holdings, Inc. SPB have increased 17.8% during trading hours on Sep 8 after the company reached an agreement to divest its Hardware & Home Improvement (HHI) segment to Sweden-based lockmaker ASSA ABLOY for a deal value of $4.3 billion in cash. This represents above 14x HHI’s projected adjusted EBITDA for fiscal 2021. Management informed that it will receive $3.5 billion of net proceeds after final tax calculations and purchase price adjustments.

The company expects to utilize these proceeds to repay debt, which in turn, will lower its gross leverage ratio to 2.5X and strengthen the balance sheet. The remaining proceeds will be allocated to organic growth, funding strategic acquisitions and returning capital to shareholders. This will help the company retain its quarterly cash dividend of 42 cents a share.

The sale of HHI is subject to some regulatory approvals and customary closing conditions. HHI’s operations will be reported as discontinued starting the fourth quarter of 2021. Post sale, Spectrum Brands business will be streamlined, thus allowing it to intensify its focus on its three core business units, namely Global Pet Care, Home & Garden, and Home and Personal Care.

The HHI segment, which includes security products, plumbing products and hardware products, contributed roughly 36% to the company's overall net sales during third-quarter fiscal 2021. The division, which houses brands like Kwikset, Weiser, Baldwin, Pfister, National Hardware, et al, reported organic sales growth of 46.7% year over year in the reported quarter. It recorded a sales increase of 48.8% on double-digit growth in all categories, particularly security, owing to strong demand and product launches.

On a pro-forma basis, management said that the company delivered net sales worth $3 billion and an adjusted EBITDA of $386 million with a margin of 13% for the LTM period ended Jul 4, 2021.

What Else?

Spectrum Brands continues to witness strength across its Global Pet Care, and Home & Personal Care segment businesses. It is also progressing well with its Global Productivity Improvement Plan (GPIP), which aims at improving the company’s operating efficiency and effectiveness while focusing on consumer insights and growth-enabling functions including technology, marketing, and research and development. Management is on track to accomplish the total gross savings target of $200 million by the end of fiscal 2022.

Coming to segment discussion, sales for the Global Pet Care business improved 6.5% in third-quarter fiscal 2021, driven by gains from acquisitions, which in turn, boosted growth in the animal category. Also, strong e-commerce sales along with a spike in demand for aquatics and reptile kits plus equipment contributed to segmental growth. The pet segment is poised for growth in 2021, backed by its pipeline of robust innovation and growth strategy.

Sales at the Home & Personal Care segment increased 9.5% in the reported quarter on growth in small appliances, personal care, hair care and garment care products. Excluding the positive impacts of foreign currency, organic net sales for the segment increased 4.2%.

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Spectrum Brands, which currently carries a Zacks Rank #3 (Hold), has gained 17.8% so far in the year against the industry’s 27.5% decline.

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