Why Shares of Energizer Holdings Are Surging Today

What happened

Shares of battery maker Energizer Holdings (NYSE: ENR) jumped Tuesday following the announcement that it was acquiring Spectrum Brands' (NYSE: SPB) battery and portable lighting business. Energizer stock was up 15% at 11:20 a.m., while shares of Spectrum were up about 2.6%.

So what

Energizer will pay $2 billion in cash for Spectrum's battery and portable lighting business, which includes the Varta and Rayovac brands. These businesses generated revenue of $866 million in 2017, along with earnings before interest, taxes, depreciation, and amortization of $169 million. The purchase will be funded with existing cash and new debt.

Energizer expects to achieve between $80 million and $100 million of cost synergies. In the first year following the transaction, it expects a modest boost to adjusted earnings per share and free cash flow, excluding one-time costs. The benefit of the acquisition will then rise as the synergies are achieved.

"The combination will enable us to leverage Spectrum Brands' manufacturing assets, significantly expand our international business and enhance our long-term brand building capabilities as we broaden our portfolio with the Varta and Rayovac brands and our geographies with Spectrum Batteries' passionate global colleagues," said Energizer CEO Alan Hoskins.

Now what

Energizer is paying nearly 12 times EBITDA for these businesses, based on reported 2017 numbers, but claims the ratio falls to just 7.5 once tax benefits and the expected synergies are factored in. That seems like counting your chickens before they hatch.

Regardless of the price, this deal will increase Energizer's scale substantially. The company produced $1.76 billion of revenue in fiscal 2017, and the deal will boost sales by about nearly 50%. The transaction is expected to close by the end of 2018.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.