Spectrum Brands Holdings (NYSE:SPB)

Corporate restructuring

On November 6, 2009 we issued an alert that SPEB had recently emerged from Chapter 11 bankruptcy. Over My Twenty years of investment experience buying stocks that have emerged from bankruptcy have been a highly rewarding strategy.  During the chapter 11 process the company communicates with the courts and debt holders to develop a viable operating plan that will ensure the survival of the company, while satisfying its obligations. Typically, all or a good deal of the common stock is cancelled and new stock is issued upon exiting chapter 11, often resulting in a tight float.  Many times, the restructured firm is eventually acquired.  The chance for investment success in these situations often depends on the terms of the restructuring arrangement as it relates to money the company owes to debt holders, vendors and suppliers.

I have found the best opportunities occur when most of the debts are forgiven in exchange for newly issued stock. The fact that debt holders are willing to accept stock shows a confidence in the long-term survival of the company.

Initially, the case of Spectrum Brands posed some challenges which is why it had not been originally coded as a GeoSpecial:

• All debt was not forgiven
• Financial leverage is above industry averages
• The company is exposed to foreign exchange risk
• The company operates in economic sensitive product categories.
• The stock had nearly doubled from its chapter 11 exit price by the time  had i found it.

Recently, my curiosity in the SPEB story has been somewhat piqued led :

• Bullish initial fiscal 2010 EBITDA guidance of $335 million to $345 million
• The announcement of a proposed merger that would increased the 2010 EBITDA forecast to a range of $430 to $440 million and reduce its risk profile.
• The company's comments that the merger (all-stock transaction) values Spectrum at an enterprise value of $2.6 billion, or $965 million net of debt, which equates to $31.50 per share net of Spectrum’s outstanding indebtedness. (The Merger Agreement proposes to bring Russell Hobbs’ network of well-known small appliance brands into Spectrum’s operating structure to form a new global consumer products company with an estimated $3 billion in annual revenues.)
• In contemplation of this deal, Spectrum intends to pursue listing its common stock on a major exchange.

What i found particularly interesting is that SPEB announced amendments to the merger :

• The board has agreed to accept alternative business combination proposals:

"To the extent that the Company receives a written alternative proposal during the go shop period that the Board of Directors, acting through or consistent with a special committee of the Board of Directors, determines would, on its own or in certain cases together with other alternative proposals, reasonably be expected to result in a superior proposal to the combination with Russell Hobbs, the Company is permitted to continue discussions with any party that submits such superior proposal after the termination of the go shop periodd."

• The board is attempting to increase liquidity in its stock:

"Under the terms of the pre-amended support agreement, the Harbinger Parties were generally prohibited from acquiring additional shares of the common stock of Spectrum Brands until the termination of the Merger Agreement. The letter agreement modifies the support agreement to permit the Harbinger Parties to purchase up to 100,000 shares of the common stock per week, up to an aggregate of two million shares, in order to provide additional liquidity to Spectrum Brands stockholders."

This is a high risk Special Situation play. I am banking that the recent news  may give shares a short-term lift. Considering SPEB as a long term investment option will require a significant amount of additional due diligence.

Maj

Sources: Business Wire (February 9, 2010 - 8:00 AM EST),  Business Wire (March 2, 2010)

.