EUR 466.30 For Business Accounts Only

Enter Ahead of Feb Split to Take Advantage of the Margin Boost

In a way that has previously created shareholder wealth for The Wallenberg family (considered the Rockefellers or Rothschilds of Sweden) via their holding company Investor AB (INVEB SS), one of the largest global appliances makers Electrolux AB (ELUXB SS) will be Spinning off its profitable commercial kitchen and laundry equipment business by February 2020. Provided no major surprises to ELUX’s end of January release of its demerger prospectus, we believe an entry position pre-Spin is warranted.

The Edge Intelligence…
Electrolux AB (ELUXB SS), the seventh largest global appliances maker, is in the final stages of Spinning off its most profitable commercial kitchen and laundry equipment business Electrolux Professional (Spinoff) by February 2020. In doing so, the parent company sets itself on a path to margin improvement led by CEO Jonas Samuelson’s ambitious re-engineering program. The benefits of this restructuring will begin to show this year in the form of improved EBITDA margins by 70bps to 8.3% in FY20E and by another 70bps in FY21E to the highest levels in a decade at 9%. This will all come on the back of savings related to its US factories increasing in automation (from less than 10% to over 35%) and reducing SKU by 75% toward the second half of FY20E.

On the other hand, Electrolux Professional (Spinoff) is set to tap into inorganic growth opportunities in the professional kitchen appliances space to aid its slowing growth. Mirroring US peer Middleby Corp. (MIDD, gained +588% in the last decade compared to the S&P 500 Index’s gain of +191%), acquired 55 companies to date and nine in the last two years to secure the market leadership position with a 3.9% share. Due to being part of a conglomerate structure, Electrolux Professional (Spinoff) only acquired two companies in the last two years. However, with its Spinoff the business will increasingly focus on inorganic growth opportunities, acquiring targets specifically in North America and quick-service restaurants where it has a smaller footprint in order to boost its top-line in the near-term.

Having said this, ELUXB SS (pre-Spin) share price declined by -10.6% (compared to the OMX Stockholm 30 Index’s gain of +1%) on December 16, 2019, because of a $70m charge (SEK 941m) resulting from the US factory overhaul. As these charges were related to accounting adjustments and inventory reductions on account of production shifts to the new facility in South Carolina (in line with the re-engineering initiative), we believe this price drop was a one-time blip and we see this as an opportunity to enter ELUXB SS (pre-Spin) at lower levels. Additionally, we believe Electrolux Professional (Spinoff) will likely experience index selling pressure post-Spin as it exits the OMX Stockholm 30 Index due to the index methodology. However, as indicated by the CEO, ELUXB (Combined) may not transfer any debt to the Spinoff, which will offset the impact of that anticipated index selling.

Management Rational for the Spinoff: ELUXB (Combined) CEO Jonas Samuelson said the separation allows Electrolux Professional (Spin) to pursue higher-multiple mergers and acquisitions in the professional kitchen equipment space. As a combined entity, acquisitions to the benefit of the Professional segment were not often made due to significant multiple differences between Parent ELUXB’s home appliances business (EV/EBITDA of 6x for FY21E) compared to the Professional segment (11.6x for FY21E). This is evident as in the last two years, Electrolux Professional only acquired two companies compared to its peer Middleby Corp. (MIDD), which acquired nine companies in the professional kitchen appliances space in the same period.

Our Take on the Spinoff – “Two Birds, One Stone”: The Electrolux Professional (Spinoff) business is the best performing arm for ELUXB (Parent) to date. However, going forward it is expected to see weakness in demand (its organic sales were down -7% in Q3FY19) and expected to grow by only +1.4% in FY20E and +2% in FY21E, lower than its historic run rate of over +8% growth. Therefore, the Spinoff transaction allows Electrolux Professional to chase inorganic growth opportunities like acquisitions like its peer Middleby Corp. (MIDD). At the same time, the Spinoff removes the possible overhang from Parent ELUXB (ex-Spin) which is expected to deliver the promised EBITDA margin improvement starting from FY20E (by 70 bps) and to further expand it in FY21E (by another 70 bps).