In a bid to expand the auto appearance portfolio, Energizer Holdings, Inc ENR, also known as Energizer, has signed an agreement with Reed-Union Corporation (Reed-Union). Energizer will acquire Reed-Union’s automotive appearance business, which includes the Nu Finish Car Polish and Nu Finish Scratch Doctor brands.
Per management, the company’s existing Lexol and Eagle One products will be strengthened with the addition of the two brands. Based in Chicago, IL, Reed-Union’s automotive appearance business operates not only in the United States but also in international markets such as Canada and Australia.
The financial terms of the deal were not disclosed. Meanwhile, the acquisition will be funded through existing cash and committed debt facilities.
The St. Louis, MO-based company is focusing on acquisitions to drive revenues. Notably, Energizer is on track to complete the acquisition of Spectrum Brands Holdings, Inc.’s SPB Global Battery and Portable Lighting Business for $2 billion, which was announced in January 2018. This acquisition includes the Varta and Rayovac brands.
The buyout will not only fortify international footprint and enhance manufacturing capabilities but will also bring synergies of accelerated innovation and wider product range. Also, the deal will induce cost efficiency which will lend the company a competitive edge in the category. In 2017, Energizer acquired Utah-based HandStands for $340 million.
Although, the company’s shares have gained 3.5% in the past three months, outperforming the industry’s rise of 0.9% and the overall Consumer Staples sector’s increase of 1.8%, the stock may derail in the near term. This Zacks Rank #4 (Sell) company has been witnessing strained margins since the last few quarters. Notably, gross margin contracted 180 basis points (bps) in second-quarter fiscal 2018, thanks to less favorable overhead absorption in the current quarter, unfavorable product mix driven due to changes related to portfolio optimization and higher commodity costs.
Though the company reported flat gross margin in first-quarter fiscal 2018, the figure declined 270 bps and 10 bps in the fourth and third quarter of fiscal 2017, respectively. For fiscal 2018, the company trimmed its gross margin forecast. It now expects gross margin to be flat to up 25 bps, excluding acquisition and integration costs, compared with the earlier projection of an increase of 50 bps.
Apart from this, Energizer exited second-quarter fiscal 2018 with long-term debt of $977.3 million.
We note that the company had debt-to-capitalization ratio of 95.6% in the second quarter. Notably, in the first quarter, debt-to-capital ratio was 96.7%, and it was 92% and 91.9% in the fourth and third quarter of fiscal 2017, respectively. Higher debt level may adversely impact the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.
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