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

Summary

  • Whirlpool announces its second large acquisition in less than a year.
  • In a sizable deal, it acquires a majority stake in Italy's Indesit.
  • Appeal of the deal relies heavily on anticipated synergies, which are not quantified yet.
  • While the overall valuation still offers appeal, the lack of growth and cyclical nature of the share price limits my desire to initiate a position at current levels.

Investors in Whirlpool (NYSE:WHR) were pleased with the company's intention to bolster its European base after acquiring a majority stake in Italy's Indesit.

The deal is the second significant deal in less than a year, as the company is following up on its ambitions to grow as a global player in household appliances. The deal looks fair in terms of revenue multiples, yet potential accretion of the deal should result from cost savings over actual earnings.

While the overall valuation appears fair, I am worried about the cyclical behavior of the stock, and I won't be buying at current historically elevated levels.

The Deal Highlights

Whirlpool announced that it has entered into an agreement to acquire a majority stake in Italy's Indesit Company S.p.A.

The company has acquired the stake of Fineldo in Indesit while it has reached binding share purchase agreements with members of the Merloni family to acquire a total 66.8% voting stake in Indesit.

The shares were acquired at a price of eleven euro, or $15.06 per share, which values the total purchase price at $1.04 billion.

The acquisition, which will need to pass antitrust approval, is expected to close by the end of this year.

Strategic Rationale

CEO Jeff Fettig believes that the deal is a great opportunity to create value, positioning the European business of Whirlpool for further growth.

The deal creates a better position for growth in a very competitive and increasingly global home appliance market in Europe. The company is confident in its ability to realize significant synergies following the deal, thereby delivering value for investors.

Synergies are anticipated to be driven by an improved asset utilization, better branding and greater distribution capabilities.

Financial Implications

While Whirlpool did not release any financial details regarding the deal, Indesit is of course a publicly listed business. For the year of 2013, the company posted sales of $2.67 billion, which was down 7.7% on the year before.

The decline in sales hit earnings hard, with operating earnings were cut in half to $68.1 million. At the same time, the net debt position of the company rose to $325 million, which is a serious headwind for the company. The deal price at eleven euros looks favorable compared to lows in the share price set around $3 in 2012. Yet the purchase price implies that long term investors in the business have seen poor to negative returns.

Including the debt position of the business, Indesit is valued around $1.36 billion. This values the firm at roughly 0.5 times sales and 20 times operating earnings over the past year.

Of course, earnings multiples are very high given the poor current profitability of the business. As such, synergies will be the major driver behind the deal, although the company has not released any guidance on both cost or revenue synergies. The company did stress that it expects to file an 8K statement later this week, providing more information.

Of interest, if one of the parties might break up the deal for any reason, a break-up fee of $55 million is required to be paid.

An Update On Whirlpool's Strategy

Whirlpool presented itself back in June at the Bank of America housing summit.

The company currently is a $19 billion global manufacturer of home appliances. Whirlpool is the leader in both North America and Latin America. It is the third largest manufacturer in India, while it holds the fourth spot in the EMEA region. The deal will of course boost its capabilities within Europe in particular.

To create value and growth, Whirlpool focuses on strong brands, leading scale and best distribution. As such, it sees the world as its home market, while it also focuses on innovation and growth beyond the core business. Of course, Whirlpool is known from its namesake brand, while it also owns brands like Maytag, KitchenAid and Bauknecht. As a matter of fact, it owns six brands which each generate sales of over a billion.

Recent growth is driven by a recovery of the U.S. economy and the housing market, although sales of appliances remain far below their pre-recession peak. To diversify away from the U.S. market, Whirlpool has expanded into Europe with the latest deal, while it also made a big commitment to China last year by acquiring a majority stake in Hefei Sanyo.

For the future, Whirlpool has set the following long term targets. Organic sales growth and deals should results in 5%-7% revenue growth per annum. Combined with targeted operating margins North of 8%, this should be the driver behind 10%-15% earnings per share growth. Disciplined capital management and an increase in asset turnover should result in greater free cash flows.

Valuation Of Whirlpool

Whirlpool released its first quarter results in April of this year. The company ended the quarter with $1.7 billion in cash and equivalents. Total debt stood at $3.3 billion, resulting in a net debt position of some $1.6 billion. This excludes pension and post-retirement liabilities of around $1.36 billion.

On a trailing basis, the company has posted sales of $18.88 billion on which it earned $735 million. Yet things are anticipated to look better for the entire year of 2014. For the year, Whirlpool expects GAAP earnings to come in between $11.05 and $11.55 per share, with ongoing earnings seen between $12 and $12.50 per share. The difference between both metrics is largely the result of restructuring expenses.

Trading at $140 per share, equity is valued at nearly $11 billion. This values Whirlpool's equity at nearly 0.6 times sales and 11-12 times earnings, depending whether you focus on GAAP or non-GAAP earnings.

Looking At The Past Performance, And Future Potential

Whirlpool has been reporting flat revenues in recent years, with topline sales coming in between $17 billion and $19 billion between 2006 and the current moment. The company has been consistently profitable, yet margins were obviously compressed during the recession, with earnings falling to $328 million in 2009. This was followed by improved earnings in the years following, peaking at $827 million in 2013.

Despite the flat revenue basis in recent years and the stable share count, Whirlpool's shares have been on the increase. Shares fell to lows of $25 during the recession to peak at $100 again by 2010. A fierce correction by the end of 2011 sent shares to lows of $50. This was followed by a steady but impressive run-up to highs of $160 at the start of the year.

Final Takeaway

Wat is noteworthy is that Whirlpool's shares behave in very cyclical way, displaying a lot more volatility than would be anticipated given the actual volatility in reported earnings.

It should also be noted that shares trade at historically high levels at the moment despite an apparent lack of topline sales growth at the moment. Of course, this deal and last year's deal to expand into China will push revenues above the $20 billion mark.

Investors have seen steady hikes in the dividend which is to be applauded. The current quarterly payout of $0.75 per share provides investors with a 2.1% dividend yield.

These increased dividends, rising stock markets and a recovery of the housing market are driving returns for investors. The long term strategy outlined by the company is comforting to investors as well. The announced deals and current revenue base should result in revenues exceeding $20 billion per annum going forwards.

Combined with operating margin targets of 8% and roughly $200 million in annual interest payments, earnings before tax could come in around $1.4 billion. Assuming slightly lower than statutory tax rates, earnings could come in around a billion going forwards.

As such I am in doubt. The overall valuation is quite appealing while the strategy is sound. Yet shares tend to behave in a very cyclical way and trade at very high levels on historical standards despite stagnating revenues. The company furthermore has quite some debt and post-retirement liabilities on its books, which will not improve following the latest deal.

Given the higher current share price in relation to historical standards, I remain a bit cautious. I will keep the company on my radar for the second half of the year.

Source: Whirlpool - Expands Into Europe, But Do Shares Offer Appeal?