Opinion: Later this month the under- nourished Waterford Wedgwood (WW) shareholders will be asked, at an extraordinary general meeting, to approve the sale of All-Clad, its US manufacturer of cookware, for $250 million (205 million) to Groupe SEB. The proposed sale has been portrayed by WW as very good news for the group. But is it?
The statement explaining the sale talks about All-Clad being a "marvellous investment". But it was never considered an investment by the non-board shareholders. Rather it was an integral part of the group. When All-Clad was purchased in 1999, group chairman Sir Anthony O'Reilly (then Dr Tony O'Reilly) said the acquisition was a significant and forward-thinking step, further increasing its US presence and moving the group closer to "luxury living" status. No mention of All-Clad being an investment then.
So has WW lost direction? Or was the strategic trading move into cookware a mistake? Sir Anthony now says: "This transaction [the All-Clad sale] transforms our balance sheet. The proceeds will put us in a position to take control of the future direction of the company, to reduce debt dramatically and to post substantial capital gain while simultaneously investing to support the sales of Waterford, Wedgwood and Rosenthal without sacrificing margin." Certainly it will reduce its strangling €383 million debt and provide it with more financial flexibility. But it also reduces its trading platform.
WW watchers should not dismiss this sale (it is subject to approval by WW shareholders and the US Federal Commission) as just an ordinary disposal. In effect, WW is selling the best-performing part of the group. A few figures tell a lot. The addition of All-Clad in 1999 raised group turnover by just 6 per cent and added 15 per cent to profits. But based on last year's figures, this US company accounted for 12 per cent of group sales and a whopping 45 per cent of group operating profits. This latter percentage is not exactly comparable with five years previously and is distorted by the very poor results from crystal (operating profit down from €28 million to €3.1 million last year) and ceramics (operating profits of €3 million down to a loss of €0.4 million). But even taking the previous year, All-Clad accounted for 33 per cent of group operating profits.
The disposal clearly shows that WW will be losing a high- earning subsidiary - it had a net profit margin of 10.5 per cent last year - with possible consequences for earnings ahead, but that, of course, will depend on the interest savings on the €205 million cash consideration and the prospects for All-Clad this year and beyond. A 5 per cent interest rate would save around €10 million in interest costs or more than the €8.8 million after-tax profit generated by All-Clad last year so the deal is unlikely to be earnings dilutive on the historic figures. In its preliminary statement - which showed group operating profit before restructuring and goodwill down from €64.1 million to €28.4 million in the year to March 31st, 2004 - WW said although All-Clad made a significant contribution to EBITDA (earnings before interest, tax, depreciation and amortisation), the after-tax impact of the disposal is small compared with the interest reducing effect of the €205 million all cash consideration.
The transaction has been hailed as a triumph for WW. Certainly the multiples, on the surface, look good. WW bought All-Clad for $110 million in 1999 so the sale represents a capital gain of $140 million and a premium on net assets of $39 million. The consideration represents a 2.38 multiple on sales and a multiple of 12.5 on EBITDA. So how does that compare with WW's purchase five years ago? Here the multiple on sales was 2.12 and the multiple on EBITDA was 11.3. Not a significant difference in these multiples, but WW appears to have done well particularly as the trading climate is now more hostile. However, had the multiples been based on the better 2002/3 figures (€21.5 million compared with €12.9 million) a less flattering light would be cast on the latest deal.
WW could, of course, argue that All-Clad's production was increased to meet demand - sales doubled under its tenure - and that any further increases could only come from more investment and the creation of demand. However, the purchaser, Groupe SEB, the French manufacturer of Tefal, Krups and Rowenta products, is optimistic about the transaction; it will be financed by debt and will not be dilutive. Thierry de La Tour d'Artaise, chairman and chief executive, said: "This move reflects SEB's ability to seize opportunities when they occur. The acquisition of All-Clad perfectly matches our strategy; not only does it allow us to pursue our international development but it consolidates our presence at the high end of the market through a premium brand and a unique access to selected distributors in the US as well as it expands our cookware beyond the boundaries of the successful Tefal brand." And Catherine Fischer, All-Clad vice-president of sales and marketing, is quoted in the Pittsburgh Post-Gazette as saying: "We believe this is a good thing for All-Clad we're enthusiastic." So is Groupe SEB capable of rejuvenating All-Clad in a way WW is not?
The sale of All-Clad is expected to go through at the end of this month so the US subsidiary should make a four- month contribution to the group results this year. It will also reduce the debt equity ratio from 190 per cent to under 80 per cent. Net debt will remain high at €180 million, but WW plans to simplify working capital management and manufacturing processes by further reducing its investment in stocks and debtors. The 18- month project is expected to reduce working capital requirements by €40 million.
While the decision to sell All-Clad was largely influenced by the group's high debt mountain, it represents a significant contraction in its business. WW's sales are now lower than in 1999. After the All-Clad sale, these will be more diminutive. And that deal will dilute the ideal of moving closer to "luxury living" status. Shareholders will be looking for results, not aspirations.
bmurdoch@irish-times.ie
