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How Does SWK Intend to Finance Its Newell Tools Acquisition?

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Financing the deal

~$1.3 billion of the purchase price of the deal will be funded by a combination of short-term and long-term debt. SWK stated that it’s committed to maintaining an investment-grade credit rating. Thus, the company will use the cash flow generated in fiscal 2017 to pay down a major portion of the debt in the next 12 months. Therefore, the hit on its leverage ratio is likely to be temporary. The company expects to incur an annual interest expense of $60 million on the debt.

SWK also stated that it’s in the process of reevaluating its mechanical security business on whether it’s a “long-term hold” for the company. If it chooses to divest this business, SWK could have an additional source of funds to pay off its debt.

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SWK estimates of EPS accretion from the deal

Excluding the acquisition-related charges, Stanley Black & Decker expects the deal to be earnings per share accretive by 15 cents in the first year after the deal is closed. In year three, the acquisition is expected to be accretive by 50 cents. By year five, the company expects the cash flow return on investment on the acquisition to be ~12%. This is reasonably close to the 10.5%–11% ROIC and ROCE of Newell’s tools business (NWL).

Investors can also check out some of the pre-earnings series that we have published in the industrials (IYJ) sector such as the Honeywell (HON), Lennox International (LII), and the Danaher (DHR) series.

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