Russ Berrie: An Interesting Potential Play

Jul.30.09 | About: Kid Brands, (KID)

This is an interesting potential play.

Russ Berrie and Company, Inc.’s Infant & Juvenile Group is composed of four wholly-owned subsidiaries: Kids Line, LLC; Sassy, Inc.; LaJobi, Inc.; and CoCaLo. The Kids Line division designs and markets infant bedding and related nursery accessories under the KidsLine® brand. The Sassy division offers products and collections such as infant development toys, teething, feeding, bathing and baby care products. LaJobi is a leading designer, manufacturer, marketer and distributor of branded infant furniture and related products. CoCaLo is a leading manufacturer and distributor of infant bedding and accessory products under the brands of CoCaLo Baby, CoCaLo Couture and CoCaLo Naturals. The businesses also license brands for select categories and markets including Disney®, Carter’s®, Graco® for cribs and Serta® for crib mattresses.

The business has undergone significant changes in the last year, first:

12/29/2008 8:15:00 AM

OAKLAND, N.J.—Gift and juvenile product maker Russ Berrie and Company has sold its gift business, which includes its plush toy lines, to The Encore Group, a privately held giftware company.

Encore acquired the stock of all of Russ Berrie’s active worldwide gift segment subsidiaries, as well as certain other assets of the gift business. In exchange, Encore gave Russ a 19.9% stake in its newly consolidated gift business, plus a promissory note for $19 million that matures in December 2013 and earns interest at an annual rate of 6%. In addition, Encore has retired the company’s gift credit line with LaSalle Bank.

Russ will retain its “Russ” and “Applause” brands, which will be licensed exclusively to Encore for five years for a fixed annual royalty payment of approximately $1.2 million. Encore will have the right to purchase these brands upon expiration of the license term, and Russ will have the right to require Encore to purchase the brands at the end of the license term, for an aggregate purchase price of $5 million.

Q1 Results:

Juvenile products vendor Russ Berrie & Co. reported its first quarter 2009 adjusted net income as $1.9 million, or 9 cents per diluted share, with EBITDA from continuing operations totaling $6.3 million.

The results also showed Russ Berrie's first quarter net sales were $56.3 million, an increase of 35.2% over 2008 levels, primarily resulting from the company's acquisition of the LaJobi and CoCaLo brands in April 2008. Gross profits for 2009 Q1 were $16.9 million, up slightly from 2008 due to the acquisition of LaJobi and CoCaLo. Acquisition of the two brands pushed selling, administrative, and general expenses to $12.5 million, up from Q1's 2008's figure of $9 million. Other expenses more than doubled to $2.2 million from 2008 levels, again due to costs incurred in acquiring LaJobi and CoCaLo.

"We are pleased with our first quarter results, which were ahead of our expectations," said Bruce G. Crain, chief executive officer and president of Russ Berrie and Company, Inc. "Our team executed well as they continued to navigate a very challenging economic environment. We are also encouraged about several fresh product placement programs we secured for the balance of the year, even as retailers remained conservative about inventory replenishment during the first quarter."

The company noted that these first quarter results reflected its first full quarter as a streamlined infant and juvenile product business focus following the divestiture of its gift business in December 2008.

The children's arena has proven to be the most resistant to the current economic conditions compared to others (note RUS is still profitable). If one also takes a walk through a Babies R' Us, you'll notice the store is stocked with the brands they sell.

The deals they have done have worked to date also. They sold the gift division that lost about $1m a quarter and in return will receive $1.1m on Dec. 31, 2009 and then the same amount annually (paid quarterly) for the next 5 years in addition to the $5m bulk payment at the end and $19m promissory note. The recent additions listed above have increased both sales and income from operations.

What is particularly interesting was this release:
Then in late May:

May 28 /PRNewswire-FirstCall/ -- Russ Berrie and Company, Inc. (NYSE: RUS) announced today that it has begun to explore a full spectrum of strategic alternatives to enhance shareholder value, a process it began as a result of several inquiries regarding potential transactions the Company received following the divestiture of its gift segment in December. While the Company's principal focus will continue to be the execution of various growth strategies for its infant and juvenile business, it will also evaluate a possible merger, acquisition, strategic partnership or sale of the Company.

Bruce Crain, President and Chief Executive Officer of the Company, commented, "The sale of our gift segment transformed our business and focused our efforts on the attractive infant and juvenile industry. Our objective now is to establish an even greater presence in the industry by building upon our market leadership. Based on the inquiries we have received, we have decided to examine a full range of alternatives that may enhance our long-term potential."

Mr. Crain continued, "In addition to considering our external strategic alternatives, we remain committed to our internal growth strategies to create shareholder value. Accordingly, we are focused on the following: first, to win market share by creating design-differentiated, branded products; second, to expand our product offerings into complementary categories; third, to grow and diversify our distribution channels; fourth, to drive sales and marketing collaboration across our businesses; and fifth, to capture operational synergies that yield cost savings throughout our organization."

So it would seem that in the process of dumping the gift division there were offers / proposals for the rest of the company that were legitimate and interesting enough for management to now want to explore them in more detail. My guess would be that a larger buyer took a look at the company, still profitable and trading for $4 a share and perhaps inquired about just buying the whole thing.

RUS is in that sweet spot now of being profitable enough to garner attention and cheap enough ($93m market cap) that a cash deal from a larger buyer is doable without any bank's financing, the hurdle for many deals being thought about today.

RUS ought to earn about $.50 for the whole year, 2009. If we apply a modest 14X-16X multiple to those earnings, we get a share price of $7-$7.84 or 60%-80% higher than the current one. Not bad for 6 months of investing?

Now the obvious risk is that the general economic downturn becomes a prolonged one. BUT, Q1 was as bad economically as we have seen and RUS earned $.06. We know Q2 was better for the general economy (company results not released yet) and Q3, Q4 even better, if only modestly. That being said, the $.50 number would seem to be a rather conservative one that would require neither substantial economic improvement or spectacular results from the company to achieve.

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Disclosure: No position