Description

Summary

We are currently long shares of Energizer Holdings (ENR).  We had previously been long ENR following the Company’s spinoff from Edgewell Personal Care (EPC) in 2015.  At the time we expected Energizer to benefit from better than expected volumes, pricing, and believed there was an opportunity for them to win back lost share from prior years of heightened competition.  We exited our position when we believed that most of these dynamics had played out and there was limited additional upside.

We continued monitoring Energizer and re-initiated our position earlier this year after two facts changed.  The first was that the Company discussed upside to its volume outlook and the second was the announcement that it planned to acquire the Rayovac-Varta business from Spectrum Brands (SPB) for $2 billion, less than 7x our estimate of EBITDA including synergies (this compared to ENR’s 10x EBITDA multiple at the time of the announcement).  We recognized from our prior work that these new facts could lead to a significant increase in ENR’s EPS and FCF in coming years so we jumped back in to the field to validate the Company’s commentary about an improved volume outlook and to understand the potential and likelihood of a deal given anti-trust concerns.

Our checks confirmed an improving battery outlook due to several factors.  The existing installed base remains stable as few, if any devices are leaving while new devices in categories like health and home are entering and requiring batteries.  The miniaturization of devices is resulting in increased demand for more expensive specialty batteries. There’s also more favorable demographics such as aging populations that need hearing aids and growing middle classes in emerging markets like China that are increasing their purchases of battery-powered devices.  This compares to the market’s view that batteries are secularly declining.

On the SPB, we heard mixed feedback on the likelihood of the deal closing given anti-trust risk, but very positive feedback on the potential upside for ENR if it were to close.  Our contacts believed that the battery market was already very concentrated with Duracell and Energizer commanding significant shares in the U.S. and Europe, but believed that ENR would not have announced such a deal if they had not already tested the anti-trust waters prior to announcing the deal.  We learned that if approved there would be significant operational and financial synergies. These include cost synergies (for example increased scale from a larger, more efficient manufacturing footprint), a broader, more global portfolio with exposure to more growth (for example in international markets and in hearing aids), the ability to raise prices, and increased distribution for Rayovac-Varta.

Since we re-initiated our position, ENR and SPB have received the necessary U.S. approvals which have been viewed as the most significant hurdle to the deal closing, and both companies have recently stated that they expect the deal to close in the second half of calendar 2018.  ENR’s stock still only trades slightly above the levels it was trading at before the deal announcement. While the deal still requires approval in international jurisdictions like Europe in order to close, we view the likelihood of these hurdles being passed as high given less concentrated market structures in those countries.

We estimate that for fiscal year 2019 ending September, ENR can earn approximately $6 per share when factoring in just the cost synergies from the Rayovac deal (a bridge follows below).  Our estimate is currently ~20 – 30% above the ~$4.50 - $5.00 in unpublished pro forma sell-side estimates and ~60% above current Street estimates which exclude Rayovac-Varta. Applying a 16x historical multiple, combined with the FCF generated in the interim, results in a price target above $100 per share, or more than 80% above current levels.

Pro Forma Earnings Power

Risks

• ENR-SPB deal fails
• Heightened competition from Duracell and / or private label including Amazon
• Rising input costs
• FX
• New technology disintermediates current installed device base or makes alkaline batteries obsolete

Catalyst

Catalysts

• Closing of ENR-SPB deal expected in 2H18
• If the ENR-SPB deal closes, upside to cost synergy targets as well as upside from increased pricing and increased Rayovac-Varta distribution
• Earnings