Whirlpool (WHR -1.35%) stock rose 17% on the day news broke that Bosch is interested in acquiring the company. Although both companies have declined to comment, a deal would make sense for both parties. Here's why.
Whirlpool receives interest
According to Reuters, diversified industrial company Bosch is looking at buying Whirlpool to bolster its household appliances business, BSH Hausgerate. Moreover, Whirlpool is arguably a much more attractive company now that it's positioned its European major domestic appliance (MDA) business with Turkish company Arcelik in return for a 25% stake in the new company, Beko Europe. The deal frees up cash resources and rids Whirlpool of a low-margin business burning cash. It also eases competition concerns in Europe for a potential takeover of Whirlpool by Bosch.
A takeover of Whirlpool is attractive for Bosch because it would immediately gain scale in the North American market and would, no doubt, come with the promise of significant synergies given the two companies' complementary home appliance products. There are also potential sales, general, and administrative savings and the potential to share sourcing and distribution channels.
Whirlpool faces a challenging year
The home appliance market is experiencing challenging times. Asian competition is strengthening, relatively high interest rates are curtailing discretionary demand from homeowners, and high inflation is pressuring manufacturers' costs. As if all of that wasn't bad enough, there's a natural retraction from the previous boom in spending on the home driven by the lockdown measures.
Such conditions raise particular challenges for a company like Whirlpool. Its market cap is about $5.6 billion, and Wall Street expects it to end 2024 with a similar amount of net debt. Management expects to generate free cash flow (FCF) of $550 million to $650 million in 2024, though Wall Street analysts are not so optimistic and on average their estimate calls for $429 million. Meanwhile, its dividend payout is currently around $380 million.
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If Wall Street is right, Whirlpool's dividend will use up 89% of its FCF (what's left of cash flow after capital spending) in 2024. That would leave the company in a difficult position if it needed to invest for growth, pay back more debt, or restructure the company.
As such, Whirlpool's management could find itself in a difficult position at the end of the year, and it might make more sense for the company to be in the hands of a larger company with the financial firepower to help it ride through a difficult period. In addition, Bosch could use Whirlpool's FCF to restructure the company rather than pay a dividend.
What if Whirlpool misses estimates?
These issues could become more problematic if Whirlpool misses its full-year expectations; unfortunately, there are signs that it may just do that. For example, its disappointing first-quarter earnings report shows a company abandoning its previously unsuccessful North American MDA promotional investments (they failed to add the expected sales volumes) in favor of a 5% promotional price increase, which might not stick.
In addition, management noted that higher supply chain costs meant it was trending toward the low end of its $300 million to $400 million cost reduction plan in 2024. Raw material inflation could also pressure its profit margins.
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Why a deal makes sense for Whirlpool
Whirlpool looks like a company that could further disappoint investors with its earnings this year. At the same time, it also looks like an outstanding value stock likely to reward long-term investors willing to stomach the potential for near-term bad news. Still, those long-term investors may find themselves staring down the barrel of a dividend cut if market conditions continue to deteriorate for Whirlpool. In addition, Whirlpool could find itself needing to restructure its debt.
All told Whirlpool's future may well belong under the umbrella of a more financially powerful parent company in a better position to invest in it for long-term growth.
