Wells Fargo raised the rating on Newell Brands due to expectations that proceeds from divestitures will come in greater than planned. Wells Fargo expects the second round of asset sales will include Newell’s outdoor & recreation division, which includes Coleman, along with the former Jarden Outdoor apparel and beverage brands and fishing brands.
“Overall, our upgrade is more of an event-driven break-up call vs. a fundamental improvement call,” wrote Wells Fargo senior analyst, Bonnie Herzog, in a note.
The asset sales are emerging as activist Starboard Value’s Jeff Smith is seeking to install four dissident director candidates, some of whom, if elected, would replace directors installed in a March settlement with famed investor Carl Icahn. The two insurgents are in the midst of a heated skirmish over which activist’s director candidates will be better suited to oversee $10 billion worth of asset sales at the company.
Herzog believes the sales will ultimately net more than $10 billion in proceeds.
“We believe NWL’s individual businesses are very undervalued at the current price, and the pending divestitures will unlock significant value, which we believe will result in a re-rating of NWL shares,” wrote Herzog.
The report noted that on January 25, Newell announced an accelerated transformation plan that included exploring the sale of multiple businesses. These include the industrial/commercial product assets, including Waddington, Process Solutions, Rubbermaid Commercial Products and Mapa and smaller consumer businesses, including Rawlings, Goody, Rubbermaid Outdoor, Closet, Refuse and Garage and U.S. Playing Cards. With the transactions expected by be completed by the end of 2019, Newell said it its remaining portfolio would focus on nine core consumer divisions with approximately $11 billion in net sales and $2 billion in EBITDA.
On February 16, Newell announced that it expected to generate $6 billion in after-tax proceeds from the sales of those businesses.
On March 19, Newell announced its cooperation agreement with Carl C. Icahn, chairman of Icahn Enterprises LP (IEP), and said it had identified another $4 billion in divestiture opportunities for a total of $10 billion now expected under the transformation plan.
In the note, Herzog said Newell has not yet identified which businesses are being considered for sale under the second round of divestitures. But she believes Newell will primarily keep its Live (led by Yankee Candle, Graco, Oster and Rubbermaid) and Learn (Jostens, Sharpie, Paper Mate and Dymo) segments.
As such, Wells Fargo expects the round-two divestitures to include the remainder of its Work and Play segments, many of which were acquired in its Jarden Corp. acquisition. These include the outdoor & recreation division, which includes Coleman, Marmot and Ex Officio apparel and the Contigo beverage business, the fishing division (Berkley, Shakespeare, Stearns, Abu Garcia, Penn, Ugly Stik), as well as the Safety & Security division.
Wrote Herzog, “We note that these businesses have fairly unique distribution channels, including Sporting Goods, specialty retailers, home centers and commercial distributors. Less likely, but also a possibility, could be Jostens or the Appliances & Cookware divisions.”
Based on Wells Fargo analysis, Newell will only need to achieve a 10-11x pre-tax EV/EBITDA multiple on the brands in order to achieve the company’s goal of $10 billion in after-tax proceeds. This is below the 12x EV/EBITDA average Newell received for the company’s eight divestitures the company made in 2017.
“As such, we do believe this could ultimately prove to be conservative. However, we note that a big wild card is the cost basis on the assets, which is unknown. That said, we believe the cost basis for certain legacy Jarden assets was partially, or entirely written up when the Jarden transaction closed. Therefore, we assume the taxes NWL would owe will be relatively low when selling legacy Jarden assets.”
Based on Wells Fargo’s analysis,
- Rawlings, which is set to be sold as part of the first round of divestitures, will likely fetch $399.3 million in pre-tax proceeds. This is based on Rawling’s sales of $332.2 million, EBITDA of $39.9 million and a growth estimate of 5 percent. Pre-tax multiples for Rawlings are estimated to be a 1.2x price/sales ratio and a 10.0x EV/EBITDA.
- Coleman is expected to fetch $1.42 billion in pre-tax proceeds. This is based on sales of $900 million, EBITDA of $134.9 million and a growth estimate of 2.0 percent. Likely pre-tax multiples for Coleman are seen at 1.6x for price/sales and 10.5x for EV/EBITDA.
- The apparel/beverages portion of the outdoor & recreation segment is expected to net $1.39 billion in pre-tax proceeds. That’s based on sales of $795 million, EBITDA of $116.1 million and a growth estimate of 2.5 percent. Pre-tax multiples for apparel/beverages are expected to be about 1.8x in price/sales and 12.0x for EV/EBITDA.
- The fishing segment is expected to generate $624.4 million in pre-tax proceeds. That’s based on the segment’s sales of $555.7 million, EBITDA of $69.4 million and a negative growth estimate of 8 percent. Pre-tax multiples for fishing are estimated to come in at 1.1x price/sales and 9.0x EV/EBITDA.
With proceeds also coming from the divestiture of Mapa/Spontex, Waddington and the company’s Home & Family and Process Solutions segment in the first round of divestitures, as well as Safety & Security in the second, Wells Fargo predicts net pre-tax proceeds of $10.8 billion.
An encouraging sign was a report by Bloomberg on April 12 that first-round bids had been submitted for Waddington by three bidders, and the business is expected to fetch $2.2 billion, representing 15.3x/14.6x EV/EBITDA multiple on a pre/post-tax basis.
“If the Waddington transaction is completed at the reported price, we estimate NWL would only have to achieve an 8.6x pre-tax EBITDA on the remaining round 1 divestitures to hit its $6B after-tax divestiture target,” Herzog wrote. “Given the relatively low takeout multiples, we believe NWL needs to hit its divestiture targets, plus the strong interest in Waddington. We believe management’s $10B target could ultimately prove conservative.”
Wells Fargo also sees two catalysts for the stock in the near future.
First, Newell could announce the terms of the first wave of divestitures (part of the original $6 billion plan) in coming weeks, “which we believe will give investors’ confidence that NWL can achieve its divestiture targets.” She further noted that being able to sell Waddington for $2.2 billion, per Bloomberg’s report, would also foster investor confidence.
Herzog expects that while Newell has said the company expects any divestitures to be completed by the end of 2019, the divestitures will likely be completed at an accelerated pace, similarly to divestitures that came following the Jarden sale. She expects the majority completed by the end of 2018. Goody, in addition to Waddington, has started its sales process, according to reports.
Herzog wrote, “In addition, we believe there will be no shortage of buyers for the businesses, which could include J2 (an investment vehicle run by ex. Jarden executives), private equity or competitors. That said, we acknowledge this will be a complicated process, with multiple transactions, disparate businesses and lots of moving parts.”
J2 Acquisition Ltd., which raised $1.25 billion in an initial public offering in 2017, is the investment vehicle of Martin Franklin, the co-founder of Jarden. Franklin resigned from Newell’s board earlier this year over a dispute involving bonuses and integration of assets consolidated into the company following Newell’s 2015 $17.4 billion acquisition of Jarden.
According to Wells Fargo, a second catalyst is Newell’s likely move to identify businesses comprising the “round 2” divestitures ahead of first-quarter earnings, “providing clarity on what will ultimately comprise new NWL once the divestitures are completed.”
Other reasons for Wells Fargo’s upgrade includes the investment firm’s belief the Newell following the divestitures will be “a simpler, faster growing, higher margin business” positioned well with e-commerce accounting for more than 20 percent of sales.
She also suspects near-term challenges, including tough comparisons facing its Elmer’s Glue business, general inventory destocking in some of its categories and the fallout from the Toys “R” bankruptcy, which are already priced into the stock, and those pressures should ease on the second half of 2018.
Finally, Herzog expects little disruption from the proxy fight. She writes, “The battle between management/Icahn and Starboard is less about the current divestiture strategy and more about direct representation. We believe NWL will likely continue to execute its present break-up strategy however the proxy battle ultimately plays out.”
Wells Fargo raised the company’s rating to “Outperform” from “Market Perform” and lifted the price target to $33 from 35. On Tuesday, shares of Newell closed at $27.37, up $1.12, up 4.3 percent.
Photo courtesy Coleman