When the disposal of Avon’s dairy operations was announced, we assumed the proceeds would be reinvested in higher return businesses. The proposed $130m acquisition of the helmet systems activities of Team Wendy is a meaningful and strategically aligned deal, with higher returns and good organic growth prospects. Both deals should complete in Q1 FY21 and taken together should be EPS enhancing, improve value creation and leave net cash balances for further reinvestment.
Avon Rubber has announced the proposed acquisition of Team Wendy in the US for c $130m plus $8m of deal costs. Based in Cleveland, Ohio,it represents an expansion of Avon Protection’s newest Helmets and Armor business. Team Wendy is a family owned business that manufactures and supplies military and firstresponder helmets and head protection systems, and is a specialist in helmet liners and retention systems. The purchase represents a reinvestment of a large proportion of the net £140m proceeds (after tax and pension payments) from the divestment of its dairy operations milkrite | InterPuls. In the year to December 2019 Team Wendy had sales of $44.2m, generating an EBITDA of $13.4m, which represents an EBITDA margin of 30.3%. The deal implies a 9.7x EV/EBITDA multiple,below that for the disposal of dairy and Avon Rubber’s own multiple.
Team Wendy’s operating profit of c $12m in 2019 replaces an expected dairy profit of c £8.5m in FY21 with a higher ROCE. The two deals should be modestly EPS enhancing with enhanced value creation and Avon retaining net cash for further reinvestment. Both deals are expected to complete in Q1 FY21, so Q420, with the disposal process said to be on track. If the Team Wendy deal completes before the dairy sale, the consideration will be financed by a new three-year $200m RCF facility. Following completion of the transaction, the new RCF should be available to support Avon Rubber’s medium-term growth objectives, including potential further M&A in line with the growth strategy. There is no change to FY20 guidance or our estimates pending completion of both the dairy divestment and the Team Wendy purchase.From FY21 Avon Rubber will change its reporting currency to US dollars.
Avon Rubber already achieves strong cash flows and is proving adept at recycling capital into businesses with higher returns and organic growth prospects.The market has responded positively to this as reflected in the FY21e P/E of 30.5x.