You Have The Spectrum-Stanley Deal Wrong, People

Oct. 9.12 | About: Stanley Black (SWK)

Spectrum Brands (NYSE:SPB) drew a 13% pop in early trade today, on news it would buy the kitchen-and-lock businesses held by Stanley Black & Decker (NYSE:SWK) for $1.4 billion.

I think analysts have this deal wrong.

First, from the SWK side. They just got $1.4 billion for a business that reflects just 9% of revenues. Their market cap is $12.26 b, so that's a premium. Also, as SWK itself noted, this is a slow-growing part of the business - the brands include things like Price Pfister faucets and Kwikset locks.

That's $1.4 billion that SWK can now invest in faster-growing segments of the business. They're eying some Asian fastener assets whose owner is in distress. That company, Infastech, has customers in electronics, automotive and aerospace, so there may be some synergies possible with other SWK units.

Also, it stands to reason that if you're selling a slow-moving part of the business the rest of the enterprise is going to get a pop - that's math. So SWK - which only earned $205 million pre-tax on $2.8 billion in revenues last quarter - might be looking at a positive earnings surprise down the road.

Now, look at SPD. They're having to borrow money to do this deal. While the deal boosts the top-line by a quarter, it doesn't do much for the bottom line. Until, that is, you look at Spectrum's plans, which are right out of the Gordon Gecko playbook. They're taking Taiwanese manufacturing assets along with the American brands - so you goose profits by throwing American names on shoddy stuff.

How long do you expect to maintain earnings momentum that way?

Yes, this boosts revenue by one-quarter. Yes, this brings some well-known brands into the fold - most of Spectrum's money comes from brands called "Global" you've likely not heard of. But one thing more. To boost revenue still further, Spectrum has to do more advertising, and it will need to continue ads for the new products if they're to stay relevant.

Frankly, I don't know how this is worth a 13% pop in the buyer and a retreat in the seller. To me it looks like things should be going the other way - toward the guy getting cash for a low-growth business.

What am I not seeing?

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