Troy, Helen of
On 2/10/14, Helen of Troy Limited (Nasdaq-HELE) announced a $300M Dutch Auction as part of a Board-authorized $550M share repurchase program; the remaining $250M of shares will be subsequently repurchased over the next three years. The HELE Board had retained a financial advisor in January 2014, two months after meeting with Sachem Head Capital Management (“Sachem”) to discuss their views on how the company could maximize shareholder value. Sachem believes there are several strategic and financial buyers that may have an interest in acquiring HELE; Sachem currently owns 1.2M shares (3.7% S/O). HELE gave an open-ended response the day after a letter to the Board from Sachem was made public on 2/4/14; the company continued to believe its shares were undervalued, even after reaching an all-time high in mid-January 2014. Last, HELE announced on 1/15/14 that Chairman/CEO/President Gerald Rubin was stepping down; he had been with the company for 30 years) and the company expects to realize ~$30M net after-tax savings in FY15 (~$0.95/share) from his departure.
The HELE tender offer price range is $57.75-$66.50 ($0.25 increments), an 8.4%-24.9% premium to the $53.23 closing price on 2/3/14 and a 2.5%-18.0% premium to the $56.36 VWAP for the ten days ending on the same date. If fully subscribed, The company will repurchase 4.51M-5.19M shares (14.1%-16.1% S/O). HELE directors and officers (as a group) own 0.4% S/O; Sachem has not indicated their intention to participate in the tender offer. HELE will fund the tender from cash-on-hand ($29M as of 11/30/13) and an existing revolving credit facility ($245M availability as of 11/30/13). There is no minimum condition; the tender is subject to no more than a 10% decrease in HELE shares and three major indices since 2/10/14. Including the additional $250M share repurchase authorization and assuming a price of $63/share, the 8.73M buyback would total ~27% S/O (based on 32.1M S/O).
We believe the Dutch Auction will be viewed as an opportunity for long term holders to monetize some of their investment at a premium price. At a $63/share tender price, HELE could purchase up to 4.76M share; this equates to ~16% of the share float (excluding Sachem and HELE directors and officers), not quite at the level of a recapitalization but more significant than the 8%-10% S/O buyback amount of the standard Dutch Auction. HELE has a concentrated shareholder base (top five holders owned 42% S/O as of 9/30/13); the potential prorate is a difficult call at this early stage of the offer and we believe market conditions going into the tender expiration will be a major factor in the percentage of shares tendered (as well as the price level of those tenders).
The HELE stock price steadily increased in 2013, from $33.42 at prior year-end to $49.38 (up ~48%). HELE shares are now trading at the $63-$64/share level. The company’s ~90% share price increase (from year-end 2012) in now similar to that of Jarden Corp. (NYSE-JAH), a comparable consumer products peer. The JAH shares are up 78% since year-end 2012; the stock price has tripled since it announced its Dutch Auction in January 2012. The share price of Spectrum Brands Holdings, Inc. (NYSE-SPB), a highly leveraged household products peer that acquired the handheld tools business from Stanley Black & Decker Inc. (NYSE-SWK) in December 2012, is up 67% since the end of 2012. Last, the HELE share price is up 18% since the Sachem letter was made public. We note the JAH Dutch Auction was well-timed to the increase in the discretionary consumer spending cycle as well as expanding valuation multiples from depressed levels. The initial $30-$33 price range of the JAH tender was increased to $32-$36 after the shares traded over the top end. The offer was undersubscribed; only 13% S/O were tendered even though JAH could have purchased up to 15% S/O. In comparison, HELE was not trading at a high single-digit P/E multiple preannouncement and the consumer recovery is well underway; we would not use the JAH Dutch Auction results as a proxy for the current HELE offer.
Using a 3.5% interest rate and a 17% tax rate (Bermuda incorporation), we estimate HELE P/F CY14E $4.30 EPS; a 13x-14x P/E implies a $55.90-$60.20/share backend value (excluding any premium for the Sachem activism). Based on a HELE $54/share trading prior (prior 20 day average closing price ended 2/3/14), HELE’s implied CY14E valuation multiples ($1.73B EV) were 1.3x EV/REVS ($1.33B, flat YoY), 8.7x EV/EBITDA ($200M, 15% margin, up 16.6% YoY) and 13.7x P/E ($3.93, up 8% YoY); the 0.97 PEG ratio reflects a 15% LT growth rate. In comparison, JAH at $62/share ($10.3B) has CY14E valuation multiples of 1.4x EV/Revs ($7.38B, up 11.3% YoY), 9.0x EV/EBITDA ($1.14B, 15.4% margin, up 20.5% YoY) and 15.6x P/E ($3.98 EPS, up 11.1% YoY); it has an 11% LT growth rate. Conversely, SPB at $75/share ($7.19B EV) has CY14E valuation multiples of 1.6x EV/Sales ($4.44B, up 2.8% YoY), 9.8x EV/EBITDA ($733M, 16.5% margin, up 16.9% YoY) and 17.1x P/E ($4.38 EPS, up 32% YoY); it has a 9% LT growth rate. Last, given HELE’s flat YoY revenue growth and projected EBITDA increase due to compensation savings from the recent executive departure, we do not anticipate the market will re-rate the stock price with higher post-tender valuation multiples.
The Dutch Auction announcement appears to be a defensive action to counter an activist shareholder that is on a value-enhancing offensive push. Assuming full debt funding of the tender, HELE P/F Debt/EBITDA leverage will increase to ~2.5x from ~1.0x. We view the higher debt level as being an interim buffer against any near-term potential takeover as well as addressing Sachem’s position that the HELE balance sheet was underleveraged. Although the current $2.0B market cap makes the company a manageable takeover target by either financial or strategic buyers, we feel the advantages of its Bermuda corporate structure makes HELE a better acquirer rather than a seller. Overall, we view the company’s Dutch Auction as a quick way to meaningfully reduce the share count and do not expect there will be another extraordinary transaction on the near horizon.
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