The Long and Short
Reading the debt spreads in Whirlpool
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Stock in Whirlpool (WHR: Baa2/BBB-/BBB) has moved higher lately on the possibility of acquisition by European auto parts and appliance manufacturer Robert Bosch GmbH (RBOSGR: A/A), and debt spreads have tightened. The move in WHR debt implies roughly an even chance of an acquisition going through or not. Comparing a stock to a cash acquisition suggests the chance of acquisition may be better an average. That creates upside for the debt.
WHR’s stock initially rose by 17% on the day the acquisition news broke but slowly gave back some of those gains throughout the week. Meanwhile in debt markets, 5-year CDS tightened by more than 60 bp and cash bond spreads tightened between 20 bp and 30 bp depending on bond tenor.
RBOSGR has no public shares outstanding as 94% of the company is privately held by the nonprofit organization Robert Bosch Stiftung GmbH, with the remaining shares held by the Bosch family. RBOSGR does have public debt outstanding that is ‘A’ rated, but the company only has Euro-denominated notes outstanding with no current presence in the US dollar debt market. It is unclear whether Bosch would choose to keep WHR debt outstanding or recapitalize the debt. In either case, it appears likely that WHR bondholders would be taken care of either through an assumption or guarantee of the debt or a friendly tender offer for the debtholders if management were uninterested in keeping the legacy debt outstanding.
Exhibit 1. WHR spreads versus IG consumer products companies.
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only
RBOSGR is a global leading auto parts manufacturer, and that business makes up approximately 60% of the company’s annual revenue. The deal appears to make sense from a strategic standpoint, as it would pair Bosch’s consumer goods segment (24% of revenue) with WHR’s market-leading position in the US and sought after line-up of strong brands in the domestic appliance segment. No details have come out about what type of funding Bosch might pursue if a deal were to become official.
Scenarios for the WHR debt
Below are some alternative approaches that the company could choose to take along with estimated impacts to credit financials. Despite differing approaches, the scenarios both appear capable of supporting very strong credit ratings, likely landing the resulting merged entity still in the ‘A’ ratings category, which would offer considerable upside to WHR bondholders.
For the purposes of these three scenarios, the assumption will be a 30% premium on the current share price of around $100 and current market capitalization of $5.45 billion. This would result in a deal market capitalization of approximately $7.25 billion, and an enterprise value of roughly $14.45 billion given WHR’s debt outstanding versus its current cash holdings. The valuation would give WHR an enterprise value/EBITDA multiple of 11.875x, which compares to its current market valuation of 10.6x. This appears roughly appropriate for its industry and the degree of cyclical cash flows generated by the company. All company financials below are presented unadjusted and on a USD basis.
First scenario: all stock
The first scenario considers an all-stock purchase of WHR by Bosch, which seems an extremely low probability given the strength of Bosch’s balance sheet and the extraordinary level of cash on hand and, in particular, given the privately held nature of the company (Exhibit 2). There would be little incentive to doing so without having to worry about the impacts of a public share price, nor does it seem remotely likely that management would dilute the ownership of the non-profit trust that holds the majority of the company. However, with no adjustments to debt or cash balances, this unlikely scenario would result in projected gross leverage of 2.3x for Bosch after the deal was completed, from its current level of approximately 1.7x. This would also result in leverage on a net basis rising from its current level of zero to about two-thirds of a turn of leverage.
Exhibit 2. Bosch pursues an “All-Stock” transaction for WHR
Source: Santander US Capital Markets LLC, Bloomberg, Company Filings
Second scenario: all cash
The second, far more likely scenario assumes an all-cash purchase of WHR by Bosch, divided evenly between cash on the balance sheet and the issuance of new debt (Exhibit 3). There seems to be a good chance of this type of funding package given the strength of the balance sheet, and the fact that the company is privately held. For this scenario the debt balance is increased by $3.625 billion, and the cash balance is reduced by an equal amount. The resulting gross debt leverage of the combined company would be roughly 2.6x, with net leverage of 1.3x. This appears commensurate with very high credit ratings and could even be gradually improved through debt reduction with added cash flows. This would present considerable upside for WHR bondholders if the USD legacy debt were to remain outstanding.
Exhibit 3. Bosch pursues an “All-Cash” deal for WHR, split 50/50 between cash on hand and new debt issuance
Source: Santander US Capital Markets LLC, Bloomberg, Company Filings
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