Hamilton Beach Brands, Inc., a subsidiary of NACCO Industries (NYSE:NC), announced today it acquired Weston Products, LLC from Highgate Capital LLC. Weston Products, which will become Weston Brands under Hamilton Beach Brands, is headquartered in Strongsville, Ohio and is a specialty food processing company. By the press release:
Hamilton Beach Brands acquired substantially all of the assets and assumed certain liabilities of Weston Products for cash consideration based on a multiple of Weston's estimated 2014 EBITDA. The final purchase price is subject to customary post-closing adjustments based on net working capital and EBITDA calculations. The acquisition was funded with cash on hand and borrowings under Hamilton Beach's existing revolving credit facility.
For the last twelve months ended September 30, 2014, Weston had revenue of approximately $32.7 million, pre-tax income of approximately $3.2 million and EBITDA of approximately $3.3 million. Hamilton Beach expects the acquisition to be accretive to earnings in 2015.
There was no exact number put on the purchase price but I'm guessing from the available information, Hamilton paid something along the lines of $35 million and assumed $15 million in debt. For a total cost of somewhere around $50 million. If the company turns out to have paid less, that's a positive, I would be very surprised if it were much more given the cash on hand at NACCO Industries.
I didn't expect this acquisition but am not surprised by it either. It is consistent with a message the company has been telling. NACCO Industries is quite ambitious with its Hamilton Brands segment. In my last PRO article on NACCO Industries I wrote management's goal is to grow revenue to $750 million in 2019 for Hamilton Brands alone, from the $400 million it was at.
The reason management wants to grow revenue so aggressively, by a CAGR of 13.4% for the segment, is that they expect to achieve more powerful economies of scale on a higher level of revenues. Per the earnings call:
And we think that, that will, that kind of volume (red: $750 in revenue) will put us in a position to have operating profit levels that are above the kinds of positions that we can get with the volume that we have today. So in other words it isn't improvements in profitability [it] will come mainly from leverage of additional volume on a cost reduction [sic].
If the company puts the cash flow from the conglomerate to work on achieving this through acquisitions, in addition to organic growth, that lofty target is suddenly a whole lot more realistic. Acquisitions like this, modest in size and with a clear goal of achieving better margins in a particular segment are something I can get behind. I remain very bullish on NACCO Industries going forward but my investment thesis is mainly built on the coal segment from which I expect good things. If management manages to achieve its goal with Hamilton Brands that is going to be an important growth driver too. The thing is that it's not just an excellent achievement of sales growth but because more powerful economies of scale will drive margins, earnings should grow exponential when successful.
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