Spectrum Brands, Inc. (SPB): Investment Story, Narrative And Structure

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It is important to identify important turning points in company’s story

In my recently published book Story Investing I discuss how to be creative in the investment research process and come up with great investment ideas. One of the highlights of the approach is the proposal to identify important turning points. Just as in any good story or movie there are important turning points, there are such inflection points in company’s history. After such turning point is identified, one can develop both a historical perspective as well as future narrative around this event. A major turning point can be a spin-off, sale of a division, a merger, etc. One should not be carried away into fantasy with this storytelling: the story should be combined with analytical thinking and should be supported by fundamental valuation.

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Facts First

On January 16th, 2018, Spectrum Brands, Inc. (NYSE:SPB) announced agreement to sell its global battery and lighting business to Energizer Holdings for $2 billion in cash. In addition, Spectrum Brands is actively marketing its appliances business (which is reported as part of company’s global battery and appliance segment).

On January 18th, 2018, Spectrum Brands announced that its 2018 Annual Meeting of Shareholders (previously scheduled for January 30, 2018) has been postponed. According to company’s press release the reason for delay is the ongoing discussions between HRG Group and the Special Committee of Spectrum Brands’ Board of Directors regarding a potential strategic transaction.

On February 14th, 2018, Tourbillon Capital Partners L.P., a hedge fund managed by Jason Karp, disclosed a 8.7% holding in Spectrum Brands. Part of the position was implemented by purchasing call options on the stock and was accumulated by the hedge fund over the last three quarters of 2017. It is worthy to note two things: it is the largest long position of the fund and as of December 31st, 2017 was valued at $566 million and represented 21% of the portfolio. In addition to this, 57.8% of Spectrum Brands is owned by HRG Group Inc, so taking into account this fact, Tourbillon’s holding represents 20.6% of public free float.

From Numbers to Narrative

I think that great investment managers are also good storytellers. Many investors believe that making good investments requires excellent skills in the analysis of financial accounting statements, building complex and detailed valuation models, forecasting future profitability of companies and otherwise analyzing numbers “to death”.

In my book Story Investing I argue that best investments are just like good stories or movies: with three part structure, important turning points, intrigue, drama, and surprises. One of the highlights of the approach is the proposal to develop both a narrative for the company and its share price.

Of course, such approach is highly dependent on one’s personal interpretation of company’s story. This storytelling should be supported by standard analytics and fundamental valuation. But it is this art of narrative thinking and story composition that will ultimately make a difference.

In case of Spectrum Brands, I believe that given the facts outlined above, there is a reasonable chance for either of two types of strategic transactions: HRG Group Inc might make a buyout offer to public shareholders of Spectrum Brands or initiate a buyback; or Spectrum Brands might enter into a share buyback transaction with HRG Group for all or part of its stake. I believe that either of these transactions will be beneficial for equity holders.

Structure and Valuation

Even if no such transaction takes place, we can see certain structure of this story and notice that shares of Spectrum Brands are at an important turning point. After selling global batteries division to Energizer (which had the lowest EBITDA margin among all divisions), Spectrum will continue to focus on its more profitable segments. This might warrant additional attention by market and investors, and in due course shares might be revalued and looked at in a more positive light.

Valuation is conservative and relatively attractive to long-term, value-oriented shareholder. We estimate that company’s shares currently trade at about x10 EV/EBITDA multiple and a 10% FCF Yield (assuming closing of the transaction with Energizer and disregarding taxes on upcoming proceeds of $2 billion from the sale). In our view the shares have a meaningful upside potential and assuming a x12 EV/EBITDA multiple gives us a three year price target of $153 or +50% upside potential from current share price.

We believe that Spectrum Brands shares provide an attractive investment opportunity for long-term, value-oriented investors.

Article By Alex Gavrish, Etalon Capital; author of "Story Investing" 

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