Spectrum Brands Sells One Brand, Preps For More

Thomas H. Lee Partners portfolio company Spectrum Brands, fresh off the sale of United Pet Group, may still put more assets up for sale to help alleviate its debt load.

Last month, Spectrum Brands sold United Pet Group, a division that makes pet food and supplies, to Salton Inc. in a deal valued at $915 million. Spectrum Brands makes and markets numerous products, including batteries, electric shavers, and home and garden products, and the company ran up a pile of debt as it added its many divisions.

To reduce that pile, Spectrum Brands unsuccessfully tried to sell its lawn, garden and insect control business in 2006. The company is likely deciding whether to put the division back up for sale, said Kevin Starke, an analyst at CRT Capital. He described the division as one of the better performing companies in a struggling sector. Some analysts think the company could shop other assets such as its Remington grooming products division and even its hearing aid batteries business, Starke said.

The United Pet Group deal, valued at about 9x EBITDA, doesn’t have the debt-reducing impact that the company had hoped for, Starke said. Many analysts expected the division to fetch 11x or 12x EBITDA, Starke said, though that was before the credit crunch. Analyst Connie Maneaty of BMO Capital Markets said the valuation was right around where she expected. “Maybe in a different market,” Maneaty said, when asked if the division could have sold for more. “But it’s been a while since we’ve had a good acquisition market.”

Nonetheless, the United Pet Group sale is a “critical step” in Spectrum Brands’s effort to lessen its debt load, Kent Hussey, the company’s CEO, said in a statement. Hussey estimated the deal would decrease the company’s total leverage ratio from approximately 8.5x EBITDA as of March 30, to approximately 7.8x on a pro forma basis. Spectrum Brands management also estimated the deal would decrease its senior leverage ratio from approximately 5.0 as of March 30 to approximately 4.0 on pro forma basis, and that it will reduce its annualized cash interest expense by approximately $70 million.

Burdensome debt has been a longtime problem for Spectrum Brands. Much of the $93.8 million that Spectrum Brands—then known as Rayovac Corp.—raised in its initial public offering in 1997 went to repay the $206 million of debt Thomas H. Lee used to finance its takeover of the company the year prior. The firm exited its investment in the company in 2002, earning a 300 percent profit on its $75 million investment, according to previously published reports. Thomas H. Lee bought back into the company in 2005, when it sold United Industries Corp. to Rayovac Corp. for $1.2 billion; it now has a 23 percent stake in the company.

To super-charge growth, Spectrum bought a series of companies from 2002 to 2005, starting with the acquisition of the consumer battery business of Varta AG, a German company. But debt used in financing the deals bogged the company down further. In recent years, the collapse of the housing market, along with rising prices for important ingredients for batteries and fertilizer, exacerbated the situation—hindering growth and its ability to pay down debt, Starke said.

Executives at Spectrum Brands and Thomas H. Lee declined to comment.

Spectrum is not the only Thomas H. Lee portfolio company exposed to the housing market. The firm also owns Nortek Inc., a Providence, R.I.-based maker of ventilation, air conditioning and heating products. In November, the company canceled its initial public offering to sell close to $700 million in common stock, for which it originally filed in May 2006, in part because of the housing downturn. Nortek management had planned to pay down debt with the proceeds from the IPO.—B.V.