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SWK Decides to Divest HHI

Zacks Equity Research

As communicated earlier with regard to finding a suitable option for its Hardware & Home Improvement Group (:HHI), industrial tool maker, Stanley Black & Decker, Inc. (SWK) recently confirmed to have reached a divestment deal with Spectrum Brand Holdings, Inc.

At its second quarter 2012 conference call, the company expressed its view that long-term opportunities from HHI were rather inconsistent with the objectives of the whole company. A possible divestment would free resources that can be later utilized for creating long-term growth opportunities.

The transaction with Spectrum will generate $1.4 billion or roughly $1.3 billion after-tax cash proceeds for Stanley Black & Decker. Completion of the deal is subject to closing conditions and regulatory approvals and is expected by the first quarter of 2013. The company intends to use half of the sale proceeds for share repurchases, a portion for debt reduction and the remaining amount for reinvestment in suitable acquisitions.

HHI divestment is not likely to significantly dilute earnings for 2012. The company affirmed no changes in its earlier issued non-GAAP earnings per share guidance range of $5.40-$5.65 and GAAP guidance of $3.98-$4.34 for 2012.

Hardware & Home Improvement Group was acquired as part of the Black & Decker acquisition—, completed in March, 2010. The business specializes in manufacturing residential locksets, residential builder’s hardware and plumbing fixtures. Major brands include Kwikset, Weiser, Baldwin, Stanley, National and Pfister brands, among others. HHI was then integrated in the former Stanley’s Security division, excluding its Pfisher business which was combined with Stanley’s CDIY segment.

Acquisitions and divestments have been the company’s primary tools for progressing on a growth strategy of shifting its business portfolio toward favored growth markets. Besides the strategic decision of HHI selling, the company in July 2012, agreed to acquire Hong Kong based leading manufacturer and supplier of specialty engineered fastening technologies, Infastech for $850 million in cash from CVC Capital Partners and Standard Chartered Private Equity Limited.

The acquisition is likely to enhance Stanley’s revenue generation capacity, especially in the Asia-Pacific region. Earnings accretion is expected immediately with roughly $0.15 in the first year of acquisition and $0.35 in the third year. Annual cost saving of $25 million is expected by the third year while the first two years of acquisition will see $25-$30 million of acquisition related charges.

Stanley Black & Decker manufactures tools and engineered security solutions across the globe. Prime competitors of the company are Danaher Corp. (DHR), Makita Corp. (MKTAY), and Snap-on Inc. (SNA). The stock currently bears a Zacks #3 (Hold) Rank.

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