Leggett (LEG) To Buy Elite Comfort Solutions For $1.25B

Leggett & Platt, Inc. (NYSE:LEG) has inked a deal to acquire Elite Comfort Solutions, Inc. (“ECS”), a leading specialized foam technology provider, primarily in bedding and furniture industries. The acquisition will boost the company’s scale of production and global presence, while gaining critical capabilities in proprietary foam technology.

The deal, which is expected to close in January 2019, is valued at $1.25 billion in cash. Following the closure of the transaction, ECS will operate within the Residential Products segment and become a separate business unit.

Deal Benefits

ECS, with its differentiated customer mix and leading position in the high-growth boxed bed market segment, will help Leggett to become a global leader in bedding technology and manufacturing. The combined entity will be a leading provider of differentiated products for the bedding industry.

The combination of these two leaders will create an opportunity for new hybrid products via utilizing both the company's best-in-class specialty foam innovation and Comfort Core innersprings technologies. Additionally, the acquisition will allow Leggett to increase its market share globally.

For 2019, the combined entity is expected to generate cash flow from operations of about $550 million. Meanwhile, Leggett is planning to enter into a $500 million five-year term loan. Additionally, the company has revised its dividend payout target to the lower end of its prior guided range of 50-60% of earnings.

Separately, ECS is projected to deliver double-digit sales growth and strong EBITDA margins in 2019. However, EBIT margins are likely to be negatively impacted due to purchase accounting. Also, Leggett anticipates its net interest expense to be approximately $90 million, fully diluted shares of $136 million and a tax rate of about 23%.

Considering the above-mentioned factors, the acquisition is expected to be neutral to EPS in 2019. Nevertheless, the company expects this acquisition to be accretive to EPS beginning in 2020.

Long-Term Strategic Plan on Track

Leggett remains focused on its long-term strategic plan. It has already achieved the first two parts of the plan that includes divesture of low-performing businesses, as well as achieving improved margins and returns. The company is now working on the third part of the plan that targets to achieve top-line growth of 4-5% annually. With this acquisition, the company is likely to achieve the target in near term.

Meanwhile, Leggett remains on track with its Total Shareholder Return (TSR) target that it expects to reach by 2020. The company’s operating targets for 2020 include generating revenues of $5 billion, EBIT margin of 13% and EPS of $3.50. Further, it expects these targets to be fueled by organic growth, which in turn is expected to be backed by strategic buyouts, with the absence of any non-recurring factors.

However, softness in the demand for Home Furniture and European Spring, along with raw material cost inflation and lower overhead recovery in Adjustable Bed pose concerns. Meanwhile, shares of Leggett have declined 21.4%, comparing favorably with the industry’s fall of 30.1% in the past year.

Zacks Rank & Stocks to Consider

Currently, Leggett carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the Zacks Construction sector include Armstrong Flooring, Inc. (NYSE:AFI) , EMCOR Group, Inc. (NYSE:EME) and Jacobs Engineering Group Inc. (NYSE:JEC) . While Armstrong Flooring sports a Zacks Rank #1 (Strong Buy), EMCOR and Jacobs both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Armstrong Flooring, EMCOR and Jacobs’ earnings for the current year are expected to increase 114.3%, 20%, and 35.2%, respectively.

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