Stanley Black & Decker Hints at Splitting Off Its Security Business
Recent comments made by Stanley Chairman and CEO John Lundgren may indicate the company is exploring a security business spinoff to boost its share price.
NEW YORK – Signs indicate Stanley Black & Decker (SWK) may be considering a spinoff of its security business, TheStreet reports.
Investors have been speculating about a potential Stanley Black & Decker split since the day the company was formed back in 2010. During its investor day on May 15, company officials seemed to signal they are taking the idea of a split seriously, according the TheStreet’s article.
Stanley Works timed the market well with its $4.5 billion purchase of Black & Decker, bulking up on power tools and construction gear ahead of a rebound in the housing market. But the New Britain, Conn.-based company in recent years has at times had trouble meeting Wall Street’s expectations, prompting plenty of suggestions about ways it could boost its share price. The company’s security business, which represents just under 20% of total sales and a smaller percentage of EBITDA, has been blamed for some of those earnings misses.
Stanley Chairman and CEO John F. Lundgren said that while its security business – which was pieced together via more than 50 acquisitions – still aligns with its overall strategy, the company needs to prove that it can produce strong margins and organic growth, TheStreet writes. Lundgren said that by mid-2016, it will be time to “reevaluate” security and its fit in the overall portfolio. “We have to prove that it can continue to grow and meet our profitability trends,” he said at the investor day.
Raymond James analyst Sam Darkatsh said in a note that he reads those statements as “formal ‘notification’ security will likely be spun-off from the existing business” as soon as margins improve, and that a spin is more than just a fallback option for if execs fail to fix the business.
Darkatsh said that it is hard to put a valuation on the security business, given the company’s unique role as both a manufacturer of equipment and provider of alarm monitoring services. But there would likely be interest in both segments, with companies including Honeywell Int’l (HON) looking to expand their smart building hardware portfolios, and security monitoring services the target of recent private equity attention.
Apollo Global Management (APO) on Tuesday announced plans to acquire both Protection 1 and ASG Security for a combined $2 billion, creating a security firm with a nationwide footprint and the wherewithal to compete with market leader ADT (ADT). Private equity has long been interested in the security monitoring business, drawn to its predictable reoccurring revenue streams and the ability to consolidate what remains a fragmented market.
An outright sale of Stanley Black & Decker’s security business seems unlikely, given its low tax base, TheStreet reports. But a spinoff would give security a currency to consolidate on its own and improve its scale, or alternatively, to auction individual parts off to the highest bidder.
Stanley in late 2013 announced a two-year moratorium on mergers and acquisitions to focus on operational improvements and to pay down debt, but in securities filings still says its vision is to be “a consolidator within the tool industry” and to build its presence in emerging markets. Darkatsh notes that the M&A hiatus would lift just as the company could be splitting off security, suggesting the company could load up the steady cash flow security unit with debt and provide the remaining tool operation with more firepower to do deals.
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