Helen Of Troy - Nice Accretive Acquisition Of Healthy Directions Improves Appeal

Jun.12.14 | About: Helen of (HELE)


Helen of Troy announces the $195 million acquisition of Healthy Directions.

The deal sounds favorable, being accretive on all metrics while boosting the growth profile.

After runaway momentum and the debt increase, I would like to see a further pullback before picking up shares.

Helen of Troy (NASDAQ:HELE) announced the acquisition of Healthy Directions which seems like a smart move to me. The company acquires a growing and profitable business at a discount compared to its own valuation.

After the runaway momentum this year I am not in a rush to pick up shares at current levels. I am a buyer around $50 per share which values shares at roughly 15 times normalized earnings. The debt load and lack of dividends are the main reasons to pay a below-market multiple for this name.

The Deal Highlights

Helen of Troy announced that it has entered into a definitive purchase agreement to acquire Healthy Directions in a $195 million cash deal.

Healthy Directions is a US market leader in premium doctor-branded vitamins, minerals and supplements which are sold directly to consumers. The company derives nearly a third of its revenues from auto-delivery of sales while it has a solid online presence as well.

The deal is expected to close in the second quarter of this year.

Implications Of The Deal

Healthy Directions generated sales of roughly $145 million for the calendar year of 2013, a 8.4% increase compared to the year before. The deal multiple values the company at 1.3 times sales and less than 8 times adjusted EBITDA. The company generates very healthy gross margins of 70%.

The VMS market allows Helen of Troy to capitalize on the health and wellness trend, a direction at which it started to capitalize by acquiring Kaz in 2010 and PUR a year later.

Healthy Direction's supplements are branded and are represented in growing market segments like the health of the heart, skin care and vision support, among others. The market for these products is expected to grow given the aging population.

Valuing Helen Of Troy

Back in April, Helen of Troy released its full year results for its fiscal 2014. The company ended the year with $70 million in cash and equivalents while debt stands at nearly $193 million. The $123 million net debt position will increase towards levels above $300 million following closure of the deal.

For the year, Helen reported revenues of $1.32 billion on which it reported GAAP earnings of $86.2 million. At $59 per share, equity in the firm is valued at $1.7 billion. This values equity at 1.3 times annual revenues and 19-20 times annual earnings.

The company does not pay a dividend at the moment.

Growth Driven By Acquisitions

Over the past decade, Helen of Troy has doubled its annual revenues, driven by bolt-on and very successful acquisitions at which the company has a great track record. As part of these deals the company has built strong and long term relationships with giants like Procter & Gamble (NYSE:PG), Honeywell (NYSE:HON), Unilever (NYSE:UN) and Revlon (NYSE:REV), among others.

The latest deal, valued at roughly 8 times adjusted EIBTDA implies a discount to the company's own valuation at roughly 9 times adjusted EBITDA. Margins will furthermore see a significant boost while the deal will be accretive to cash flows, EBITDA as well as earnings per share.

The pro-forma company will have a high debt load, but this should be very manageable. Pro-forma revenues will be about $1.5 billion as normalized earnings should come in at or above a $100 million. This values shares at 17 times earnings which seems fair.

Implications For Investors

For most of the past decade, shares of Helen of Troy have largely traded in a $15-$35 trading range. Shares have seen runaway momentum at the start of the year with shares increasing to highs of $70 by April. Ever since a 15% correction has taken place which pushed shares to current levels around $59 per share.

This momentum has been driven by the Dutch tender offer which the company held to acquire 3.69 million shares for $66.50, at a cost of $245 million. I don't like the move at all, and would have preferred a much more steady and low-profile share repurchase program.

That being said, management is making wise decisions about deal-making and running the operations. I'll be happy to pay a 15 times multiple for the company, valuing shares around $50 per share. My enthusiasm is limited due to the increase in the debt load following the latest deal and the lack of dividends.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.