It has been a season filled with aroma for consumer product company Jarden (NYSE:JAH) after it managed to procure Yankee Candle for about $1.75 billion. Yankee is the largest candle maker in the U.S., and the deal was funded with a mix of cash, common equity, and debt. Madison Dearborn Partners was the original owner of Yankee since 2007 and aspired to get $2 billion for the company, but eventually agreed to the $1.75 billion offer by the New York-based company Jarden.
The acquisition of Yankee has been in accordance with the business strategy of Jarden. Over the years, this company has been looking forward to expanding into contemporary business lines by acquiring companies that operate in totally different niches. The consumer product maker might not have been able to become a popular household name until now, but it certainly has some popular products -- such as Crock-Pot slow cookers, Rawlings baseball equipment, and Sunbeam home appliances -- that have established themselves as brands.
The acquisition of Yankee will certainly have a positive impact on the image of the company as Jarden looks to capitalize on the 560 Yankee retail outlets across the U.S. and Canada. The offerings are not restricted to the sale of fragrant candles only. Yankee presents immense cross-selling opportunities for Jarden, and there is the potential to unleash the cost and distribution synergies that have been created as a consequence of this deal.
A Closer Look at the Deal
There has been a lot of speculation regarding this $1.75 billion acquisition, as Jarden looks to accumulate on its margin. Last year, the gross margin for Jarden stood at 29% while similar figures for Yankee were close to 57%, which is almost double that of its parent company. The CEO of Jarden has also been looking to beef up sales growth in recent times, and the latest acquisition by the company has already delivered on this front. A year ago, Yankee managed to achieve 7.4% sales growth, while sales growth for Jarden has almost been static since 2010. The much-expected organic growth had been a distant dream for Jarden, but with the procurement of the scented candle business, the prospects look much better.
One of the major reasons cited by company officials for this accomplishment was the positive impact on Jarden's cash flows. Yankee has been a safe bet over the years, and the 52-week period that ended this June shows that the cash flow stood at $82 million. This clearly highlights the fact that Yankee has tremendous potential in its daily operations. It is also anticipated that consolidated cash flow will increase the inflows for Jarden by 25%. This is extremely beneficial for a company that is constantly looking for new avenues to build up its business. In fact, the extra cash on hand would do no harm to the company as it seeks avenues of growth in entirely different business propositions.
Investors have already placed their bets on Jarden, since the acquisition has impacted shares by more than 10%. Jarden sold approximately 11.6 million shares to acquire Yankee and expectations are high, especially when Jarden has claimed publicly that "transaction will be accretive to adjusted earnings per share, pre-synergies." This increase is estimated to be approximately 10%. This does not come as a surprise when we observe what the new entity has to offer. Yankee has been a steady performer over the years, and even during the recession the company has been able to remain afloat.
One of the reasons for its sustained success has been the trust that Jarden has put into it, even when the original parent company pumped a considerable amount of funds in it during the recession so that Yankee would continue steadily on its growth path. This could also be one of the several reasons why Yankee was sold at $1.75 billion even though the owners were expecting $2 billion. With the patronage of Jarden, Yankee could advance well with its success rate and at the same time provide incentives to the company funding it.
A Need to Be Cautious?
While investors have been looking at the brighter side of this acquisition, there are several possibilities that suggest the synergies may not materialize as expected by Jarden. Over the decade, many such acquisitions have already been undertaken, and similar bets were placed on the success of such proceedings. However, we do know that there might not have been a drastic impact in the outcome for Jarden due to these acquisitions. Sales remain flat and the internal growth as expected by the CEO is not quite there. Since 2010, there has been an endeavor by Jarden to capitalize on past alliances in order to boost sales, but the gains on cross-selling and cost reductions were merely hypothetical. With Yankee maturing progressively in the market, it suggests possibility of déjà vu that cannot be overlooked. One should also anticipate the capital market movements of the stock to subside if there no significant turnover observed in the next few quarters.
A lot is being speculated on with this latest merger by Jarden, and there are many reasons why this procurement might just work out. These two companies have matched up quite well in the recent past and by cementing the band further, there is immense potential in the synergies that have been created. In a statement issued by the company, there are a number of possible reasons to make investors believe that this is, indeed, a safe bet. Yankee has considerable presence outside the U.S., and this could be another area where Jarden can find leverage. Unfortunately, the niches these companies operate in have been victims of turbulent business cycles. To think that the deal has no underlying risks would be too optimistic of an assumption, considering Jarden's past business explorations.
The idea of cross-selling may also be farfetched considering the range of products that are currently being offered by Jarden. Not only are the products distinctly different from Yankee, but without having access to retail outlets one cannot envision any other expectation of cross-selling. In the end, we can only hope that Yankee will gain a new lease on life for its parent company and, at the same time, sustain its distinct aroma for a considerably longer time span.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Analysts at EurEx Consulting. EurEx Consulting is not receiving compensation for it (other than from Seeking Alpha). EurEx Consulting has no business relationship with any company whose stock is mentioned in this article.