Lenders Balk At Spectrum Brands’s Proposed Pet Division Sale

Senior lenders to Spectrum Brands, a company partially owned by Thomas H. Lee Partners, blocked the company’s plan to sell its pet division, delivering a setback to the struggling household products maker’s ongoing effort to reduce its debt.

Spectrum Brands agreed in May to sell United Pet Group, which makes pet food and supplies, to Salton Inc. The deal, valued at $915 million, was called by CEO Kent Hussey a “critical step” in the company’s effort to reduce its debt. Hussey said in a statement that the company would continue to operate the pet division and that its board and management team “remain committed to finding and executing appropriate alternatives for reducing the indebtedness of the company.”

The company has about $1.7 billion of secured debt and $1 billion of subordinated debt. The sale of United Pet Group, valued at about 9x EBITDA, would have lowered Spectrum Brands’s total leverage ratio from approximately 8.5x EBITDA as of March 30 to approximately 7.8x on a pro forma basis; it would have also reduced its senior leverage ratio from approximately 5.0 as of March 30 to 4.0 on a pro forma basis, and its annualized cash interest expense by approximately $70 million.

Spectrum Brands makes and markets batteries, electric shavers, and home and garden products. Thomas H. Lee owns about 23 percent of the company.

The company was already facing challenges related to its leverage prior to making a string of acquisitions from 2002 to 2005, starting with the consumer battery business of Varta AG, a German company. Debt used to finance the deals bogged Spectrum Brands down further. The problems were then exacerbated by the collapse of the housing market as well as rising prices for important ingredients for batteries and fertilizer.

Executives at Spectrum Brands and Thomas H. Lee did not return calls requesting comment.

This is the second time the company has tried and failed to sell an asset to reduce its debt. In 2006 the company shopped its lawn, garden and insect control business to no avail. Many analysts expected the company to try to sell even more assets following the pet division sale, a prospect that’s been thrown into doubt. “They’re running out of options,” said Kevin Cassidy, a senior credit officer at Moody’s.

Following the collapse of the United Pet Group, together with Spectrum Brands’ inability to sell its home & garden business, Moody’s Investors Service confirmed Spectrum Brands’s speculative-grade Caa1 corporate family rating, but downgraded its probability of default rating to Caa2 from Caa1. The company’s Caa1 corporate family rating reflects its high leverage, weak interest coverage and limited financial flexibility, according to Moody’s. Moody’s also upgraded the senior secured credit facility to B1 from B2 and confirmed the senior subordinated notes rating at Caa3.