Tuesday, May 24, 2005

Hung Out to Dry – The Maytag Man Packs Up

On May 19, Maytag Corporation agreed to be bought out by a consortium of private equity groups led by Ripplewood Holdings LLC, for $1.13 billion in cash and the assumption of $975 million in debt. The deal values Maytag at $14 per share, a far cry from the $45 it was trading at 3 years ago, or even its much lower 52-week high of $26.44.

This is the sad endgame to a 6 year tailspin that the owner of brands such as Maytag, Amana, Hoover and Magic Chef could not pull out of. Therein lies the cautionary tale that even the most well-known brands will not guarantee financial success if management doesn’t have a clue.

Sleeping on the Job

As a mid-size player in the consumer durables industry, Maytag was increasingly squeezed by its lack of distribution scale versus behemoths like General Electric and Sears Holdings’ Kenmore brand. It was also blindsided by the emergence of a new breed of players like Electrolux, Samsung and LG, who displayed a heightened responsiveness to consumer desires.

Buffeted by rising costs of inputs like steel, plastic and energy, Maytag was slower to restructure and improve manufacturing efficiency than similar sized competitors like Whirlpool. Its social commitment to its home base in Iowa may be laudable, but as the man said, you’re no good to anyone if you’re dead.

Its stellar reputation for quality and reliability aside, it certainly didn’t help that Maytag continued to plod along with insipid designs, and even ignore entire segments of the market altogether. Hoover, once synonymous with vacuum cleaners, squandered its lead by refusing to introduce economy-priced models that consumers flocked to. Even if Hoover wanted to stay upscale, Maytag could have at least introduced economy vacuum cleaners under one of its other brands.

Turning a Sinking Ship Around

Maytag needs help on multiple fronts. They need to cut costs and rationalize production capacity. They need to bring out snazzier designs. And they need to grow beyond their core North American market.

Maytag has done a good job recently in bringing out appealing products at the top end of the price range, such as its Neptune® line of kitchen appliances, but it needs to stop boxing itself into the premium corner of the market. Ripplewood brings with it expertise in operating in Europe and Asia, and will likely look to move production overseas in a bid to get costs in line with industry averages. Any realistic turnaround strategy will take a few years to execute, and it is probably easier done outside the glare of the public markets, where the pressure to deliver earnings growth every 90 days can throw companies off track.

Our key concern here is Ripplewood’s plans for Maytag. They are acquiring a positive cash flow business with an image of solid reliability, and as a private equity firm they could simply ride out the investment for the free cash flow. Will they simply lay off everyone in Iowa and move operations to China? Or will they actually invest in developing innovative new products that can compete head on with Electrolux and Samsung, who have had remarkable success integrating information technology and electronics to traditional consumer durable products? How do they intend to penetrate markets abroad when Maytag has already tried and failed?

A Fair Deal for Investors?

Shareholders are staring at losses on their investment in Maytag, considering that most of them bought their shares at significantly higher prices. The consensus seems to be that Ripplewood will get away with highway robbery if it snatches up Maytag with the offer currently on the table. In fact, Maytag is already trading at prices higher than the $14 offer price. This indicates a belief that the deal does not offer fair value to shareholders and is probably not going to happen unless Ripplewood loosens its purse strings some more. Maytag’s debt is already rated junk, so its questionable how much more debt Ripplewood can pile on to go through with the leveraged buyout.

This has naturally led to speculation that there may be other offers forthcoming. GE and Electrolux have been mentioned as possible candidates, although Electrolux may itself be a likely target. The fact remains that Maytag’s stable of brands is a tempting draw for anyone looking to break into the North American consumer durables market. Even though they have been damaged by long-term neglect, their brands are still among the most well-known in their segments, and we still hold out the hope that they can be nursed back to health.

But hey, look at the bright side – at least $14 a share is better than nothing if Maytag goes belly up!

Amit Chandra

Oliver Banz

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