Stanley Works sees deal adding to earnings by 2nd year

BANGALORE (Reuters) - Tool maker Stanley Works (SWK.N), which is buying rival Black & Decker Corp (BDK.N) for $3.46 billion in stock, said the combined company is expected to earn about $5 per share in the third year after the close of the deal.

The transaction, which combines a top hand tool maker and a power tool maker, will really start to add to earnings from the second year.

In 2008, Stanley Works earned $3.41 a share, excluding items. Black & Decker earned $5.47 a share, before items, in the year.

The deal is expected to be closed in the first half of 2010. The combined company, which will be called Stanley Black & Decker, sees $600 million in charges in the first year.

The companies said the driving motivation of the deal is the $350 million in annualized cost savings as well as the improved finances of the more diversified company.

Black & Decker has almost reached the limit in terms of how much it can reduce costs, analyst David MacGregor of Longbow Research said.

With the outlook for power tools remaining rather dismal, Black & Decker realizes that the only way it could sustain value for shareholders is to combine with somebody else, he said.

Black & Decker Chief Executive Nolan Archibald said, "we will have global low-cost sourcing and manufacturing platforms, and a broader geographic sales footprint with additional opportunities in high-growth emerging markets."

The increased resources from cost synergies will be used to invest in security solutions, engineered fasteners and other high-growth platforms, Archibald said on a conference call.

In North America, Europe and Asia, there are significant organizational overlaps, Stanley Works CEO John Lundgren said. These overlaps, Lundgren said, will allow for consolidation and integration of back office functions.

These integrations will lead to about $135 million of synergies. Another $95 million of cost synergies will come from elimination of corporate overheads, Stanley Works said.

"We expect to continue to invest about two-thirds of our excess free cash flow in acquisitions and growth," Stanley Works CFO James Loree said on the call.

Stanley Works -- whose brands include the Stanley line, Bostitch, Proto and Mac Tools -- supplies tools, hardware and security systems.

Analyst Sam Darkatsh of Raymond James said while the deal does implicitly add to security sales, it increases exposure to construction and consumer-related end markets as well as to mass retail.

There will also be revenue synergies, Stanley Works CEO said, adding that they will be looking at cross-selling opportunities of products of both companies in existing mature markets.

"We are targeting a strong investment rate credit rating, no less than BBB+ and perhaps as high as single A over time," Stanley Works CFO Loree said.

Analyst Michael Lasser of Barclays Capital said in a note that the transaction raises the obvious question of how it will affect the home improvement retail industry.

"While the combination could put some pressure on the gross margins of the retailers over the long term, we think the near-term impact on Home Depot (HD.N) and Lowe's Cos Inc (LOW.N) will likely be muted given the size and market positions of these companies."

Shares of Black & Decker, whose brands include DeWalt, Kwikset and Price Pfister, were up 24 percent at $58.47 in afternoon trade on the New York Stock Exchange. They earlier touched a year-high of $60.02.

Stanley Works shares rose 5 percent to $47.26.

(Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Gopakumar Warrier, Ratul Ray Chaudhuri)