TH Lee Reconnects With Familiar Face –

Almost a decade ago, Thomas H. Lee Partners teamed with David Jones to acquire Rayovac. A year later, in 1997, the firm took the battery maker public, and it wasn’t until the summer of 2002 that the Boston buyout shop finally sold the last of its Rayovac holdings.

Despite the split, the two have maintained close ties. In 2002, Thomas H. Lee and Rayovac teamed up on a joint bid for Pfizer’s Schick-Wilkinson Sword razor unit (which they ultimately lost), and ex-T.H. Lee Managing Director and current Special Partner Thomas Shepherd still sits on Rayovac’s board of directors.

The bond between T.H. Lee and Rayovac gained even more strength earlier this month, when the firm agreed to sell United Industries, its lawn-care and pesticide platform, to Rayovac in a deal valued at about $1.35 billion, or 8.4x United’s pro forma 2004 EBITDA. The sale price is made up of a $70 million cash dividend, which will be paid to United investors, the assumption of $880 million of United debt and the issuance of 13.75 million Rayovac shares (NYSE: ROV), which will again make Thomas H. Lee the largest shareholder in the company with a 25% holding. Rayovac will also realize a tax benefit from the acquisition, essentially slicing $140 million off of the purchase price.

While the sale of United Industries is not an exit, per se, the deal does represent a profit for T.H. Lee, at least on paper. And the firm is anticipating that will grow alongside the price of Rayovac’s stock. Shares of Rayovac jumped on the acquisition amid investor enthusiasm for the deal and by the closing bell on Tuesday, Jan. 4., when the deal was announced, Rayovac’s stock surged more than 17% to $34.65 a share. At that price, the value of T.H. Lee’s new stake in the company would come in at over $475 million. Couple that with the $70 million dividend, and the firm’s roughly $300 million equity investment in United Industries has nearly doubled in value.

“This is not really an exit for us. We certainly know Rayovac very well and they approached us, which created an opportunity. There’s a small cash component [to the deal], but we’re looking at this as a chance to enhance our investment,” said Scott Schoen, a partner at Thomas H. Lee. “We expect there will be significant benefits to combining these businesses and we expect that to lead to additional upside for us.”

T.H. Lee confirmed its long-term commitment to Rayovac by agreeing to a one-year lockup that will prohibit United shareholders from unloading any stock of Rayovac.

Growing With Pesticide

T.H. Lee originally acquired United Industries in 1999 through a recapitalization valued at $620 million, giving the firm a 90% stake in the business. Following the buyout, United went on an acquisition spree, gathering assets such as Pursell’s Sta-Green, Vigoro and Bandini fertilizer brands, the garden-products business of Schultz Co., and WPC Brands, a maker of outdoor health products and insect repellent. Most recently, United expanded its reach to Canada with the acquisition of The Nu-Gro Corp. in a $144 million public-to-private deal, and also added to its end markets with the purchase of United Pet Group.

Even as T.H. Lee no longer controls United, the firm is still interested in seeing the business realize its plan for the company. “At this point there still hasn’t been any consolidating of the pet businesses, and there are a lot of attractive opportunities to build a larger pet franchise,” Schoen said.

Meanwhile, with the combination of United and Rayovac, both parties expect to see benefits all around. Jones in particular has extolled the potential growth in the categories Rayovac has added. The company’s CEO pinpointed that the lawn and garden industry grows at a 4% to 5% clip annually, while the household insecticide market sees increases of 7% to 8% and pet supplies have shown 9% growth for the past 10 years. Additionally, he estimates that synergies from the combination of the two businesses should amount to between $70 million and $75 million in cost savings over the next three years in the areas of IT, manufacturing, purchasing distribution and administration.

As evidenced by the run-up in Rayovac shares following the deal, marketwatchers have given this acquisition a thumbs-up as well. Bear Stearns, for one, called the merger “uncommonly complementary” in an analyst note, and cited that the transaction will “bring seasonal balance to Rayovac’s quarterly earnings,” while allowing for considerable cross selling opportunities and the wherewithal to meaningfully leverage category management opportunities.

Some analysts cited the integration risk and others mentioned price as potential risks to the deal. Merrill Lynch noted, “…the price tag was a bit higher than Rayovac has paid over the past three years,” but the firm added, “the company is further diversifying and in the process, gaining entry into higher-growth categories.”