Shares of Maytag
Haier created Haier America in 1999 to expand its global presence. In fact, it recently constructed a $40 million refrigerator-manufacturing facility in Camden, S.C., which happens to be a very business-friendly state. So adding a well-known brand like Maytag to a lower cost structure would be a great thing for them.
Maytag's cost structure, however, has been posing a significant problem. While sales have been expanding, gross margins have declined 11 percentage points in four years. Without good gross margins, very little money drops to the bottom line because selling, general, and administrative costs are essentially fixed.
Snapping up Maytag would make Haier a serious player with a well-rounded product line against the likes of General Electric
Using lower cost manufacturing, Haier America could expand gross margins back to 20% levels. In addition, Haier America already has relationships with retailers such as Home Depot
Let's say the shareholders demand a 15% return on investment and expect free cash flow to grow 5%. Using a constant growth dividend discount model, the implied value is $2.1 billion, meaning bids could possibly go as high as $26 per share. Although my calculation is pretty crude, it is not unreasonable. That leads me to believe that the Haier group, which is more likely to operate the business rather than cash it in, can expand its bid past $17.50 and still generate great returns.
Maytag says it will take eight weeks, with help from Merrill Lynch
So the Ripplewood group has eight weeks to determine what their next submission will be. Let the bidding war begin!