Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Global consumer products company Jarden (JAH) surprised the market before Tuesday's opening by announcing its intention to acquire Yankee Candle Investments.

The deal is more than fair and should be applauded by investors, which they did in early trading on Tuesday. Yet the overall valuation and leverage increase makes me a bit wary to pick up shares after strong returns so far this year.

I remain on the sidelines.

The Deal

Jarden announced that it has reached a definitive agreement to acquire Yankee Candle Investments for $1.75 billion in cash.

The leading specialty-branded scented candle company was previously held by a fund managed by Madison Dearborn partners, a US private equity firm.

The deal will boost Jarden's portfolio of strong consumer brands in niche categories. The company hopes to achieve synergies by cross-selling and broadening the distribution possibilities.

Yankee Candle currently operates some 560 stores across the US and Canada.

Yankee Candle generated sales of $863 million over the past year. The business reported adjusted EBITDA of $205 million, for an EBITDA margin of 23.8% which is roughly double that of Jarden before the deal was announced.

The $1.75 billion price tag values the business at 2.0 times annual revenues and 8.5 times EBITDA.

The deal is expected to boost adjusted earnings per share by some 10% before taking synergies into account. Note that actual synergy estimates were not provided.

The deal is subject to normal closing conditions, including regulatory approval, and is expected to close in the fourth quarter of the year.

Valuation

Jarden ended its second quarter with $788.3 million in cash and equivalents. The company operates with $3.93 billion in total debt for a net debt position of around $3.1 billion. The deal is funded with an unspecified combination of cash, newly issued shares, bonds and normal bank debt.

Revenues for the first six months of the year came in at $3.34 billion, up 5.3% on the year before. GAAP earnings fell by 40% to $72 million. At this pace annual revenues could come in around $6.9 billion, excluding the contribution from Yankee Candle. Net earnings for the year could come in around $200 million.

Trading around $45 per share, the market values Jarden at $5.1 billion. This values operating assets of the firm at around 0.7 times annual revenues and 25 times annual earnings.

Jarden does not pay a divided at the moment.

Some Historical Perspective

Long-term investors in Jarden have seen excellent returns. After setting lows of $8 at the start of 2009, shares have steadily risen to highs around $50 in May of this year.

Shares have seen a tiny pullback ever since, trading around $45 at the moment. At these levels, shares are still trading with gains of 30% for the year.

Between the calendar year of 2009 and 2012, revenues have increased by a cumulative 30% to $6.7 billion. Net income roughly doubled to $244 million but is set to fall this year.

Investment Thesis

Overall the deal seems to make sense. Jarden is willing to spend roughly $1.75 billion, or almost a quarter of its own enterprise valuation of around $8 billion, to acquire Yankee Candle. The deal will boost annual revenues by merely 12%, but this is made up by the superior profitability and gross margins of the firm. To illustrate, gross margins of Yankee Candle were 57% compared to 29% for Garden.

As such the 2.0 times sales multiple represents a premium compared to Jarden's own valuation, while the price tag at 8.5 times adjusted EBTIDA occurs at a slight discount to Jarden's valuation at roughly 10 times adjusted EBITDA.

With the deal investors receive the benefit from earnings per share accretion, diversification and ownership of a strong iconic brand. Yankee Candle has a strong history of earnings and revenue growth driven by high customer loyalty.

While 2013 will be tough given the first quarter hit on the devaluation in Venezuela, the deal should bring some excitement to shareholders. Definite financing choices have to reveal how far the current $3.1 billion debt level would increase.

The deal makes perfect sense within Jarden's strategy to acquire leading consumer brands with strong cash flow and customer loyalty characteristics. The company now sells goosd ranging from canning jars, coolers, playing cards, sportswear and ski equipment, among others.

On top of that, the 7% compounded annual growth rate over the past decade for Yankee Candle looks favorable compared to Jarden's 3% to 5% organic long-term sales target.

Overall it is a great deal, offering diversification and growth opportunities at a fair price. Yet I remain on the sidelines after this year's strong returns, the increased leverage and the fairly high price-earnings valuation.

Source: Jarden: Solid Acquisition Of Yankee Candle