Analysts discuss likely outcomes of Maytag buyout offers

Analysts discuss likely outcomes of Maytag buyout offers
 
Date August 08, 2005
Section(s) Local News
Brief  
 
By PETER HUSSMANN

Editor

The big blue lights that mark Maytag‘s corporate headquarters and its flagship production plant could soon go dim or dark, depending on who wins the bidding war for the corporation’s control.

Analysts specializing in the major appliance industry foresee different scenarios depending on who is the successful buyer. For Newton and Jasper County, the prospects range from a short-term “business as usual” mode to a complete end to the 112-year-old company’s presence.

Local residents are only now realizing the possible hardships of a Maytag breakup, but industry experts have long seen Maytag as in jeopardy.

“They’ve been on the block for years,” said David MacGregor, a long-time home appliance industry analyst with Longbow Research in Independence, Ohio. He said the company has had several offers over the past five years.

The outcomes locally could be substantially different depending on who buys the company.

The first bidder, Ripplewood Holdings, is a New York City investment firm famous for buying struggling businesses, dramatically restructuring them, and then reselling them to net handsome profits for its investors.

Ripplewood has submitted a cash bid of $14 per share, including the assumption of nearly $1 billion in Maytag debt. The offer totals about $2.1 billion. Shareholders are scheduled to vote on the offer next week.

The other bidder is Whirlpool Corp., the world’s largest home appliance manufacturer and fierce rival of Maytag.

Whirlpool, in a defensive effort to ward off a bid by Haier America, the U.S. arm of a Chinese appliance manufacturer, offered $18 per share in a cash and stock buyout proposal. The Benton Harbor, Mich., company is currently poring over Maytag‘s books, with a Tuesday deadline for submitting a firm offer.

The ramifications for Newton and Jasper County are as different as the two bidders, but either would mean major change for Newton and Jasper County.

“Whichever company acquires Maytag, the new owners will change some aspects of Maytag‘s organizational structure and operations, which could mean a loss of jobs in Newton,” said Dr. Tom Root, an assistant professor in the College of Business and Public Administration at Drake University in Des Moines.

Ripplewood Buyout

Stock analyst MacGregor sees a Ripplewood buyout as having little direct impact on the community in the short run, but he foresees major changes in the longer term.

At first, employment would stay fairly stable at the Maytag headquarters operation, and the Maytag plant would continue to put out machines. The Newton Laundry Products operation, he said, is too valuable to the company’s overall welfare to be eliminated.

But Ripplewood can be expected to attempt to renegotiate the union’s current four-year labor contract, he said.

Root, the Drake professor, agreed that corporate headquarters would be likely to stay in Newton and that local jobs would be less severely impacted in a Ripplewood buyout than in a Whirlpool takeover. This is because Ripplewood does not already have a corporate structure in the industry.

“While Ripplewood has a wide array of holdings in many industries, they are less well positioned to take advantage of possible synergies compared to Whirlpool,” he said.

“To put it simply, they do not have the industry knowledge that Whirlpool does, but look for opportunities where they see potential in the industry and firms that have a good long-term record but are struggling currently. They see a value in the current operation and in the reputation Maytag has established and believe in the long run they can be operated in a more profitable manner.”

But MacGregor warns that Newton residents should not be lulled into a false sense of security if Ripplewood is successful.

“You get to keep your jobs for now,” MacGregor said. But, he said, “It’s only postponing the inevitable. Maytag has too many plants for the size of its business. It’s a shrinking enterprise. The situation is unsustainable.”

As an investment firm, Ripplewood is in the business of buying low and selling high. It does not plan to operate Maytag long-term, MacGregor said, but rather to come in, “do some of the rough work” to make the company profitable and then “flip it” in the next three to five years – selling it at a price well above what it paid.

The most likely scenario, he said, is that Old Lonely may soon be working for a foreign appliance manufacturer, most likely based in Southeast Asia. By doing the “rough work” of restructuring before selling the company, Ripplewood would head off the political battering a foreign buyer would sustain if it took over an American icon and stripped away hundreds or thousands of American jobs.

A Ripplewood takeover might have the least immediate impact on Newton and its Maytag jobs, but MacGregor does not think Maytag shareholders will take that path.

“There’s a low probability Ripplewood will acquire Maytag, when shareholders are sitting on a potential $18 proposal,” MacGregor said. He noted Whirlpool’s drop-dead time frame for submitting a definitive offer for Maytag control. “They won’t miss that deadline,” he said.

Whirlpool Buyout

Whirlpool, MacGregor says, appears motivated to acquire Maytag in an effort to “rebrand” the abundance of new products churning out of its numerous research and development centers around the world. The outcome could be good for the Maytag brand, due to what MacGregor calls Maytag‘s “dearth” of new product platforms.

“By rebranding, Whirlpool can create some excitement in Maytag products and bring back some life and excitement to the company,” he said.

Whirlpool’s worldwide manufacturing base would allow it to close a number of Maytag‘s North American plants, most likely its smallest manufacturing operations, and eliminate those fixed costs, MacGregor said.

He predicts a Whirlpool acquisition would have the most immediate negative impacts on Newton. He believes the Maytag production plant would be likely to remain open and might even draw additional investment and product platforms if the union contract can be renegotiated. But Maytag corporate headquarters would probably be quickly closed.

Benefits would include a stronger negotiating position with suppliers and access for Maytag products to the market through Whirlpool’s larger and better distribution system. MacGregor notes that Maytag uses General Electric’s distribution system to supply its products to Home Depot, the fastest growing home appliance retailer. Home Depot accounted for 10 percent of Maytag sales last year, only behind Sears at 13 percent.

“They’re going through their competitor,” MacGregor says incredulously.

Dr. Root speculates that a Whirlpool takeover would mean the loss of more corporate jobs because they are already in the appliance business.

“One of the first things they will likely do is streamline management since they already have people performing similar duties,” he said. “One of the common cost-cutting moves in this type of situation is looking for redundancies in operations and eliminating them.”

In terms of manufacturing employment, Root said, both firms could have reason to keep current employees.

“I have seen a couple of analysts speculate that Whirlpool needs more capacity,” he said. “Skilled workers in Maytag‘s plants would be an excellent quick source of employees with industry-specific skills.

Ripplewood might change some production facilities looking for cost saving, but also needs to find a way to continue producing appliances, so the net impact is difficult to determine.

“My guess is that Ripplewood is less likely to make big changes in the short term. Ripplewood has indicated that it intends to keep a presence in Iowa. Whirlpool has not.

“In a nutshell, it looks like Whirlpool may be better for the long run survival of the firm from a shareholder point of view. However, they may also be more costly in terms of lost jobs in Newton.”

Scrap the Whole Thing

Nicholas Heymann, a Prudential Securities analyst from New York City and long-time researcher in the home appliance industry, sees another strategy Whirlpool might follow. Whirlpool, he said, “could just scrap the vast majority of Maytag‘s appliance operations and produce its own better-engineered products and sell them under the Maytag brand.”

That option, however, would be costly.

“This option would require the company to shutter the vast majority of Maytag‘s remaining 10 plants in North America, an undertaking which we estimate could cost $500 to $700 million in severance and closure costs, not including the likely cash payment of $500 million or more to Maytag‘s underfunded pension plan that appears likely to be required under pending pension reform legislation now being considered by Congress,” he said.

“Then there is the $870 million in net debt that Whirlpool would likely have to assume as part of any purchase agreement. Finally, it would be obligated to likely pay the vast majority of the more than $600 million in unfunded post-retirement health care benefits to which Maytag retirees and employees are currently entitled.”

Union issues

Heymann said another critical issue with either buyer could be whether they attempt to get Maytag‘s unions to reopen their contracts to secure more favorable terms.

If this can’t be achieved, “It remains unclear … whether either acquisition proposal would be concluded as currently envisioned,” Heymann wrote in a note to investors.

He says Maytag has lagged other manufacturers in controlling manufacturing costs, weakening its competitive position. Companies like Whirlpool moved some production offshore more than 10 years ago, while Maytag opened its first low-cost home appliance operation in Mexico just last year.

But Heymann lauded Maytag‘s recent delivery on a pledge to renegotiate its contracts at its Herrin, Ill., and Searcy, Ark., facilities. This paved the way for Maytag to begin migrating its top-load washers to Herrin with the companion dryers being manufactured in Searcy. This will likely negatively impact production levels in Newton.

One key to the four-year agreement at Herrin, according to Gary Jarvis, president of the I.A.M. Local 544, as reported in The Southern Illinoisan newspaper in June, is the adoption of a flexible work schedule.

“We also approved alternative work schedules, which would allow the company to implement, if necessary, four 10-hour work days or three 12-hour work days and still count them as a 40-hour work week,” Jarvis said. “That allows the company more flexibility to stay competitive in today’s market.”

Local production

Maytag reached a contract with UAW Local 997 members in Newton a year ago after a three-week strike halted production. Union workers took concessions calling for an increased share of health care costs, but the company said the contract was not enough to allow for new product platforms to be produced at the Newton plant.

“While good progress was made at the Newton laundry plant, it is still Maytag‘s highest-cost facility,” said former Maytag spokesperson Lynne Dragomier after ratification of the four-year agreement.

Maytag has said it is continuing discussions with UAW Local 997 on cost issues.

Maytag previously announced plans to reshape its manufacturing footprint, which could include closing its Newton facility and its North Canton, Ohio, Hoover production operation.

While the impacts could be devastating to the communities involved — the Newton plant employs about 1,350 workers — Wall Street sees this as good news.

In a note to investors, Heymann wrote, “Maytag expects to finalize its new restructuring plan over the next few months, which will include possible asset write-offs, likely factory closures and accelerated depreciation charges. The company will likely tap its new $500 million credit line to fund these initiatives.

“We would favorably view any migration from higher cost production facilities to lower cost countries. These actions to reduce costs, plus the company’s decision in May to cut its quarterly dividend to $0.09 from $0.18 previously, should certainly help Maytag become more cost-competitive.

“Still, the company is not moving as fast as its competitors to reduce costs and it faces continually rising debt burdens to fund its drive to reduce costs while its consumer franchise works overtime to not deteriorate any further.”

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