The Price of Urgency: Unpacking Leggett & Platt's HFI Sale to Somni Group

Sometimes, in the intricate world of corporate finance, a transaction comes along that just… doesn't quite sit right. It raises an eyebrow, perhaps a few questions, and leaves many wondering if a truly fair shake was had. That's precisely the feeling swirling around Leggett & Platt's (LEG) recent announcement to offload its Hydraulic Cylinders and Fluid Power Products, or HFI, business to the Somni Group for what appears to be a rather modest $125 million in cash.

Now, on the surface, a divestiture might seem like a prudent move for a company like Leggett & Platt, which, let's be honest, has been navigating some pretty choppy waters lately. They've been grappling with a tough housing market, a noticeable dip in consumer demand, and, like so many others, the weight of significant debt. Selling off a non-core asset to streamline operations and chip away at that debt load? Sounds reasonable enough, right?

But when you start peeling back the layers and digging into the numbers, that initial sense of reasonableness quickly gives way to a gnawing concern that this deal might be significantly underpriced. And frankly, that leaves a bitter taste for shareholders.

To understand why this $125 million figure feels so low, it helps to look at a comparable deal from not too long ago. Cast your mind back to 2018, when Leggett & Platt itself acquired Elite Comfort Solutions (ECS). That transaction fetched a whopping $1.25 billion. At the time, ECS was pulling in roughly $1.1 billion in revenue and generating about $115 million in EBITDA. If you do the math, that deal clocked in at a multiple of around 1.1 times revenue and a solid 10.8 times EBITDA. Pretty healthy figures, all things considered.

Fast forward to the present, and let's consider the HFI business that's now on the block. Analysts are projecting HFI to generate roughly $200 million in revenue and a respectable $20 million in EBITDA for 2024. Now, if we apply Somni Group's $125 million offer to these projections, we're looking at a multiple of just 0.6 times revenue and a rather paltry 6.25 times EBITDA. See the discrepancy? It's not just a small difference; it's a canyon.

Even if we account for the current challenging market conditions—and no one is denying they're tough—and slap a generous 20% discount on the ECS valuation multiples, the HFI deal still looks decidedly weak. At a 20% discount, we'd expect a revenue multiple closer to 0.88x and an EBITDA multiple around 8.64x. Based on HFI's projected financials, that would translate to a sale price closer to $176 million or even $172.8 million, respectively. Suddenly, that $125 million starts looking like a severe haircut, perhaps even an unjustified one.

So, why would Leggett & Platt seemingly agree to such a price? It boils down to their current predicament. They're under immense pressure to deleverage, and fast. The capital markets aren't exactly throwing money around cheaply these days, making debt refinancing a costly endeavor. This urgent need to reduce debt, combined with a downturn in their core markets, appears to have put management in a very tough spot, potentially forcing their hand into accepting an offer that, under normal circumstances, would likely be scoffed at.

It's a classic case of selling from a position of weakness. While the company certainly needs to address its balance sheet, the timing and valuation of this particular divestiture leave many wondering if shareholder value is truly being maximized here. For long-term investors, it’s a moment of reflection: is management making the best strategic decisions, or are they simply prioritizing immediate debt relief at the expense of capturing fair value for what appears to be a solid, albeit cyclical, business?

Ultimately, this deal underscores the difficult tightrope act that many companies face in today's economic climate. While the sale of HFI will indeed inject some much-needed cash and reduce debt, the lingering question remains: at what cost, and was it truly the fairest price for an asset that, given better market conditions, might have commanded significantly more?