Newell Rubbermaid (NYSE:NWL) recently announced their buyout of Jarden (UNKNOWN:JAH.DL) for $17 billion, with plans for a larger, combined entity that could enjoy even greater scale and other synergies than either company had previously.
On this episode of Industry Focus, Fool analysts Vincent Shen and Sean O'Reilly discuss the build up and key details behind the Newell Rubbermaid-Jarden merger. They also cover the long-term vision for World Wrestling Entertainment (NYSE:WWE) as the company increases subscriber numbers and looks abroad for growth.
A full transcript follows the video.
This podcast was recorded on Dec. 15, 2015.
Sean O'Reilly: Do you smell what Vincent Shen is cooking on this Consumer Goods edition of Industry Focus?
Greetings, Fools. I am Sean "The Crushinator" O'Reilly, joining you here from Fool Headquarters in Alexandria, Virginia. It is Tuesday, December 15th, 2015, and joining me to talk about consumer goods is the one and only Vincent Shen. What's up, man?
Vincent Shen: Crushinator... I like that.
O'Reilly: Do you want to be The Rock or something?
Shen: No, I can't take inventory out there.
O'Reilly: I didn't watch wrestling growing up, so this is the base of my knowledge.
Shen: You are forgiven... barely.
O'Reilly: So, just to give our listeners an outline, we're going to talk the Newell Rubbermaid-Jarden buyout. We're going to talk about wrestling, because they're about to roll out their Netflix-y type service in Japan. It's actually a big deal. I'm very impressed with what this company is doing. But first, apparently, the ladies, Gaby over in the financials podcast, started a little bit of a trend of giving book recommendations. Did you hear about this?
Shen: I did, I heard a little bit about it.
O'Reilly: They got a ton of emails about book recommendations for investing in financials.
Shen: It sounds like some of our listeners want to hear about our investing financial book recommendations. So, what do you have, Sean?
O'Reilly: So, this is a consumer-goods show. I actually have a really good book picked out for the tech show on Friday. Stay tuned. But really, not only was it an entertaining book, but it was a book that really drives home the power of owning a levee of amazing consumer brands, was the '80s book, Barbarians at the Gate, about the leveraged buyout of RJR Nabisco. Hugely entertaining. These guys are just throwing around billions of dollars trying to buy this thing.
The price, I think, winds up getting doubled. Originally -- and I'm sorry, because the CEO of RJR Nabisco, and his name escapes me -- but he proposes a leveraged buyout in the '80s of the company he captains, and this onslaught of LBO buyout artists just start bidding up the company. I actually think they wound up having to restructure in the early '90s. I knew that Warren Buffett, your friend and mine, actually owned some bonds in them, and he made a bunch of money on it.
But they leveraged it up so much that even tobacco and Oreos couldn't pay off all the debt. But such a cool company, cool story. So I highly recommend it. Head on over to Amazon.com; you could probably get it used for $5 or $10.
Shen: If that.
O'Reilly: Yeah. What is it, some books are a penny?
Shen: It's an absolute classic.
O'Reilly: You probably had to read it.
Shen: It's on my short list, and every person I've ever spoken to said it's a really interesting look into a period that some people considered the Wild West -- in terms of all the buyout action and things like that -- on Wall Street. It's a really interesting inside look into that world.
O'Reilly: We should do a book club.
Moving on, big news this week. Newell Rubbermaid offered to buy Jarden for $15 billion -- 15 followed by nine zeros. Real quick for listeners who may not be aware of these brands -- can you (1) provide us with a history of the company, and (2) paint a brief picture of their recent performance?
Shen: Yeah. So, we've had some pretty acquisitive shows recently. We talked about the Keurig deal recently...
O'Reilly: I'm sorry to interrupt. You know what I think? I think the Federal Reserve is about to raise interest rates a little bit, so everybody's like, "Oh crap, debt's about to go up, we need to buy stuff." That's my theory.
Shen: That's an ongoing trend. This has been a really big year overall for M&A deals. As a result, we've had an opportunity to talk about some of these really nice-size buyouts and mergers like this one. So this most recent one, as you mentioned, is between Newell Rubbermaid and Jarden. So to give you a little bit of history, because I think it's very interesting how these companies have approached and grown into the business if they are today.
Martin Franklin, founder of Jarden, a pretty young company, founded in 2001. He served as the CEO for about a decade, and in that time, amassed a pretty formidable portfolio of consumer brands. So some of the one that I saw when I was looking through the list that really stood out to me are classics like Bicycle, the playing cards...
O'Reilly: Oh my gosh, they own Bicycle.
Shen: Yankee Candle, Coleman outdoor products, Marmot outdoor products. And just to give you an idea of how acquisitive this company has been, just in October, Jarden announced that they would be acquiring Jostens for $1.5 billion -- Jostens being the provider of class rings and yearbooks for schools.
O'Reilly: Taking me back to high school, Vince.
Shen: And now, Franklin has taken this company, and its umbrella includes over 120 brands.
O'Reilly: Did you know it was this big? My eyebrows are popping here.
Shen: I had no idea, but when I was looking through all these logos and the brands in their website, I was really surprised, like, "Wow, I recognize quite a few of these." I didn't know it was all under this umbrella.
O'Reilly: So is this Franklin just cashing out?
Shen: I'll get to that, and he's cashing out quite nicely, actually. So Newell Rubbermaid has a bit of a longer history. It started in 1903 in New York, when Edgar Newell purchased a company that was in default, and renamed it.
So he obviously started building out that business. But it was in 1965 or so when the company began its own run of acquisitions. They tout that they've done over 70 of those over the past 30 years as they were seeking growth for the company. Some of the big names in that portfolio include Lenox, Sharpie, Parker, Calphalon. In 1999, they purchased Rubbermaid for about $6 billion, hence the name now. And again, like Jarden, very recently, Newell Rubbermaid had recently acquired Elmer's for $600 million in October.
O'Reilly: Taking me back to second grade.
Shen: So really big household names that they have in their portfolio.
O'Reilly: Definitely not just a plastic container company, for sure.
Shen: Exactly. So beyond what Rubbermaid's known for... so in terms of the performance of these companies, their stocks recently, they've done very well, both of them have done very well since the financial crisis. Jarden's up nearly 300% over the past five years.
During that same period, top and bottom lines have grown at about a 10% CAGR. So nice healthy growth. And Newell Rubbermaid itself has had choppy results, but it's also up about 140%. These are easily surpassing the broad mark in the S&P 500.
O'Reilly: So you and I are in Alexandria, Virginia, not working at the intersection of Broad and Wall. We're not super in the know, but we're pretty on the up and up, and this came out of nowhere. Was there a run-up to the deal that we maybe missed? Were they talking for a while?
Shen: Sure. There were some rumors, and it's actually interesting how the whole thing came about. I think it was Franklin who said, the founder of Jarden, he was introduced by, I think a banker or something, at an investing conference, to the CEO, I believe, of Newell Rubbermaid, and that's when it started. It was as recently as September.
O'Reilly: Wait, they're all having drinks, and it's like, "Hey, you should buy him!"
Shen: Well, they were introduced to each other I think as recently as September, and those talks must have developed very quickly. And the rumors for this deal -- they were actually reported by, I think, The Wall Street Journal about a week ago. So on these initial reports that this potential merger was happening, Newell Rubbermaid shares traded up about 7.4%, Jarden shares similarly gained about 3.7%, and then, obviously, yesterday, the deal was officially announced by the two companies.
Total equity value is about $13 billion. Other key terms in terms of the payment -- each Jarden shareholder will receive 0.862 Newell Rubbermaid shares and $21 cash for each Jarden share they own. Once the deal closes, Newell Rubbermaid will own about approximately 55% of the combined company. The new entity is going to be called Newell Brands, nice and simple, and it'll be led by the current Newell Rubbermaid CEO, Michael Polk, who I mentioned was, I believe, the guy who was introduced to Franklin not too long ago, and they came together on this.
O'Reilly: Is Mr. Franklin sticking around in any capacity?
Shen: He will be joining the Board of Directors.
O'Reilly: He's getting a lot of shares, I imagine.
Shen: He currently is no longer a CEO at Jarden, but he's still involved, and he'll be joining the Board of Directors, along with two other Jarden current executives. So Newell brands -- they mentioned in the press release that they want to leverage, the new large size, the new scale they have once they're combined to increase their presence with retailers, increase their presence across geographic markets, improve their distribution, their cross selling, their marketing capabilities. I see a lot of those possibilities there. A lot of those complementary brands, product offerings that they have.
They also touted about $500 million in cost synergies expected to be realized over the next four years. If all of those synergies come to fruition, this new company, Newell Brands, will enjoy about $3 billion in annual adjusted EBITDA. Large, very large.
Shen: Sixteen billion dollars of revenue. Big, big name in the consumer-products space, for sure. So talking a little also about the deal value and the premium, how well Jarden shareholders are coming out of this, because the rumors came out about a week in advance, stocks have been a little volatile since then.
But basing the buyout price on the most-recent closing price, so for yesterday, Jarden shareholders are getting about $57.33 per-share value, and that's about a 19% premium to where they were trading pre-buyout rumors. So a little over a week ago. And then, if you look based solely on their pre-rumor levels, Jarden shareholders are getting about $59.64 per share, about a 23% premium. Jarden was actually also trading just over 15x forward earnings, with analysts forecasting about 10% earnings growth over the next five years.
So an almost 25% premium -- that's not too bad for a company showing that has logged 10% growth over the past five years, and is expected to continue that rate. Like I mentioned, some of the complementary offerings -- they have a ton of brands that will work with each other, and that they'll be able to cross sell. Kitchen, baby products, outdoor products.
Going back and rounding this out, on that discussion about Michael Franklin and his payout, The Wall Street Journal reported that he's expected to gain as much as $500 million from this year.
O'Reilly: It's good to be him.
Shen: That includes a significant portion from his ownership in Jarden, and what he's getting as a result with the cash and stock combination. But there's also some interesting details from his existing employment contract; there's some clause that says if it's not renewed within two years, or something along those lines, he also gets another $130 million in stock and cash and other benefits.
Shen: On top of that, the Journal also reported something about he has the option to purchase the company planes at their financial-statement price. So you can depreciate that as an asset. So after just a few years, its value gets appreciated very quickly. So he might be able to get those for pennies on the dollar compared to what the actual market value is. So it's just another interesting tidbit for how the founder of Jarden is cashing out here. But overall...
O'Reilly: It sounds like a fair deal for most parties.
Shen: He's done an incredible job. This company, since 2001, has done an amazing job building up its business. Its revenue, for this year, I think, actually surpasses that of Newell Rubbermaid. But Rubbermaid has the bigger market capitalization, so it can be seen as the buyer. But overall, I'd consider this more of a merger of equals than anything else.
O'Reilly: Cool. Before we move on, I want to point our listeners to our newly redesigned focus.fool.com. There, you'll discover a special offer to join The Motley Fool Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer.
So moving on. Vince... you're taking me back to middle school with this one. We're talking WWE, World Wrestling Entertainment.
Shen: Yes. I just wanted to give a quick update here, because I think this company has gone through a bit of an upheaval, implementing major changes to their business strategy.
O'Reilly: It's working.
Shen: It's working for them now, yeah. Their prospects are getting a lot better after their stock tanked, absolutely tanked last year. So just a quick update. The company recently announced that they would be launching their WWE Network streaming service in January in Japan.
The price will be $9.99 per month. They'll still be offering the first month of service free, no strings attached. You can cancel any time, no long-term commitments. So this is just like what they're currently offering in the North American market, for example.
And this is a really important part of the company's long-term strategy, because the network has increased by about 1.3 million subscribers as of the third quarter. So that's up a very impressive 80% about from the same period last year.
O'Reilly: $10 a month... that's a chunk of change.
Shen: Exactly. They offer that first month free, but paying subscribers are also still up an impressive 62% year over year. So through the first nine months of 2015, though, looking at Japan in terms of international markets, those first nine months of 2015, international revenue is up 43%, $119 million. So now, it makes up about a quarter of the top line. And this, I feel, is just the beginning. So, for full year 2014, the Asia Pacific region was already the second largest market outside of North America.
O'Reilly: I did a little digging -- they've been doing stuff in Japan since the mid-'90s. So they're there.
Shen: I'm not sure if it has to do with the culture. Obviously, sumo wrestling is popular in that market, so maybe this is part of the reason. But overall, wrestling is very popular in Japan. So this is a strong market for them.
And this is, in addition, keep in mind, to the fact that they launched on the Indian subcontinent recently, and they'll be launching in Germany, targeting China, Thailand, the Philippines. So, again, that Asia market being just slightly the largest, I have a feeling it's going to be growing as a piece of their overall top line.
O'Reilly: From what I read, apparently they have, at the very least, some kind of online presence in about 50 countries. I was consistently surprised as I read more and more about what's going on with wrestling right now. They became profitable again in the last three quarters. Ticket sales to live events were up 8% or 9% year over year. This is not a dying company by any stretch of the imagination.
Shen: Yeah. And a big question is -- originally, a lot of their bread and butter came from the big pay-per-view events. But they rolled out the WWE Network, which gives you...
O'Reilly: Do you know what one of those cost, by the way? Like $20, right
Shen: The pay-per-view ones? They could be $40 to $50.
O'Reilly: Wow, OK.
Shen: So they switch the model, so you're paying $10 a month now; but instead, you get access to every pay-per-view event. You get access to, I think, the archival footage that they have, at least for the Japan launch. It's like 4,000 hours of content.
O'Reilly: Correct me if I'm wrong -- but you get free access to that when you pay the $10 a month for the subscription?
Shen: Yeah. It's part of what you get.
O'Reilly: You get, literally, every WWE match in history as part of this subscription.
Shen: Yeah. Tons and tons of archived content. In the beginning, there were a lot of concerns about whether offering this is going to really hurt their pay-per-view income, or if the company is going to be able to make this work, but they've managed to get to that point where, OK, now they're at the profitability level with the WWE Network that they were at previously. It's just a matter of expanding their geographic presence into new markets. This should be a nice growth driver for them, in terms of a long-term strategy.
For the stock itself, it peaked in March of 2014 at about $31 per share, plummeted to $11 per share just two months later in May, and since then, the stock has been making a slow recovery. It's up 35% year to date. In terms of valuation, though, it trades pretty rich -- 35 times forward earnings.
O'Reilly: Yeah, that's not cheap. I remember well that drop -- $31 to $11 -- and the reason was, at the time, they were worried about cannibalization. That was when they were talking about the rollout, and they were like, "Wait, you're giving up on pay per view and shifting to this Netflix-y type model? What?"
Shen: There were a lot of fears about the subscriber number is not coming in strong enough at the time. But since then, they've been able to reverse that, and the stock's made a nice recovery. The valuation's a little high based on the growth that they've projected, but overall, I think this is an interesting company to look at, that was able to, so far, I'd say, successfully execute on a major change to their strategy.
O'Reilly: And just to wow our listeners a bit further, I did pull up some social-media stats from their latest quarterly filing. This is really cool. WWE has the most-viewed channel on YouTube in August, ranking above other popular channels such as BuzzFeed and Taylor Swift. WWE exceeded 660 million social-media engagements to date in 2015, and continue to rank sixth on Sprinklr's Social Business Index, ahead of the MBA, NFL, and other media properties.
Shen: Wow. There you go. I loved it as a kid, and I still remember a lot of the big names from back then.
O'Reilly: Another thing -- Stone Cold Steve Austin has a podcast.
Shen: Now I know what I'm going to be listening to on the train home today.
O'Reilly: Well, thank you for your thoughts. Do you like the stock? What do you think?
Shen: I'm a bit torn. The valuation's a bit high for me based on the growth profile. But overall, this is a really interesting company I still like to watch. If some of our listeners feel bullish enough in terms of their rollout into these new markets, it's not a bad thing to consider for your portfolio.
O'Reilly: Cool. Thanks for your thoughts, Vince. Have a good one.
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