Quick Thoughts – ENR, a Roll-Up now Rolling…Down?
In conjunction with its earnings release this morning, ENR announced its intent to separate into two, separate publicly traded companies:
- Consumer products (batteries and lighting products) – battery category is in secular decline, excellent free cash flow profile, capital structure and cash return opportunities.
- Personal care (shave, skin and feminine care) – “sexier” (on a relative basis) growth story, but still a modest long-term revenue growth profile (2-3%).
We have seen this movie before (no/slow growth vs. growth assets) and a separation to garner more appropriate multiples – it works, by and large:
- Philip Morris (old style) – domestic and international tobacco
- KFT – KRFT and MDLZ
- DF (old style) – DF and WWAV
- SLE (Sara Lee – sort of) – HSH, among others
Why does it work, beyond the initial announcement? Simply put, no more robbing Peter to pay Paul – management is forced to focus on growing and managing each business in discrete fashion, diligently examining the cost structure, growth rates and investment profile of each business rather than managing the slower growth asset with benign neglect.
Our experience is that investors tend to gravitate toward the growth asset, but in some cases, with the right jockey (Tony Vernon at KRFT, Sean Connolly at HSH) the slower growth asset represents the greater opportunity relative to expectations.
Turning back to ENR, we had the name on our preferred list coming out of our December initiation on the group on the basis of Exhibit 1, which we see as a proxy for cost savings opportunities under the assumption that everything outside of direct product costs is under management’s control to one degree or another. Taking a fresh look at this analysis, we see that EL, HSH, SJM and AVP continue to represent longer-term opportunities from a cost savings perspective.
There isn’t any need to chase ENR today – we can quibble over the respective multiples that the market might assign to the businesses, but much of the heavy lifting in terms of stock price appreciation has been done this morning. In all likelihood, the next opportunity in ENR comes down the road when the market (potentially) says “who wants to own a battery company, at any price?”