Thursday, October 26, 2006

Yankee Candle...Darn, It's Going Away

Yankee Candle (YCC) announced yesterday that it had agreed to be acquired for $34.75 per share in cash. Quoting the release:

The Yankee Candle Company, Inc. ("Yankee" or the "Company"; NYSE:YCC) today announced that it has entered into a definitive merger agreement under which an affiliate of Madison Dearborn Partners, LLC ("MDP"), a leading private equity investment firm, will acquire all of the outstanding shares of Yankee for approximately $1.4 billion in cash. The total value of the transaction, including assumed debt, is approximately $1.7 billion. The Board of Directors of Yankee has approved the merger agreement and has resolved to recommend that Yankee's shareholders adopt the agreement. The transaction, which is expected to close in the first quarter of 2007, is subject to approval by Yankee's shareholders, as well as other customary closing conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

It is interesting to note that this is its second equity buyout...the company was acquired by Forstmann Little back in 1998 before being taken public in 1999.

Readers may remember our previous post on Yankee Candle where we highlighted our positive views on the company.

Results have been gratifying since that time, largely a function of the aggressive buyback of shares that the company has pursued. As of the end of the quarter, the weighted average of fully diluted shares was 40.08 million shares as compared to 44.22 million shares a year ago and about 54.5 million shares back in 1999 upon initial IPO.

The company appears to be firing on all cylinders with retail sales (including the Illuminations acquisition) up 25%. Yankee retail stores appear to have turned the corner with same store sales up 8%, the third consecutive quarter of improvement. Wholesale sales were up about 11%, well above expectations. The only rain on the parade that I could discern was a build in inventories, up about 27% in line with sales. Bank debt was up about $103 million.

On a TTM basis, the business is “smoking” with an ROE of 106% and a return on invested capital of about 25%. Pity that management and Madison Dearborn will be reaping the results! It is important to remind you and myself that the takeover is still subject to various approvals by regulators and shareholders. But the likelihood seems strong.

Not an idle backhanded comment from yours truly. For those who purchased at the IPO back in 1999 at $18, you have earned a compound return of merely 8.75% as of yesterday, demonstrating the dangers of investment bankers bearing initial offerings. For those who have looked for Mr. Market to provide them better entry points, the stock is up 57% from the day prior to the announcement July 25th, 2006 that the company was reviewing its strategic alternatives.

As one shareholder observed in yesterday’s conference call, “Good luck. Dearborn is probably getting a good deal. I think the worst times are behind you and you’ve got good times ahead.”

As I have observed before, takeovers may be short term gratification but long term, are a pain in the butt. Just when you get to know the business and returns are accelerating, it gets taken away and you have to look for another idea. There are worse problems admittedly, for example when you really don’t have a handle and management is absconding with the cash flow, but this company was a little jewel.

Disclaimer: I, my family, and many clients currently own a position in Yankee Candle.


At 11:10 PM, Blogger David J. Phillips said...

Check out my latest posting & you will see that given recent Executive "Change in Control" Agreements signed by all top executives at YCC, the deal MUST close by March 31, 2007. The sweet smell of timing--just like a burning Yankee Candle!

David J Phillips, Publisher


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