Smith & Wesson Diversifying In New Buyout (SWHC)

Smith & Wesson Holding Corporation (NASDAQ: SWHC) is growing.  The gunsmith has entered into a definitive agreement to acquire Universal Safety Response Inc., a privately held full-service security systems solutions provider, founded in 1994.  The  terms of the deal are for up to 9.7 million shares of common stock and  $26.2 million in cash.

The acquisition will be immediately accretive excluding the purchase accounting impact for its fiscal Year-End April 30, 2010; approximately breakeven per share on a US GAAP basis.

USR is also the original creator of the GRAB® vehicle safety barrier, which S&W says represents the fastest growing barrier technology in the world and is what the company says is the only active barrier product that meets the Federal Highway Administration’s TL-2 safety test, the Department of State’s K12 L3 security test, and the Department of Defense ASTM M50 Shallow Mount security test.  The company serves a variety of clients in the defense, transportation and petrochemical industries, airports, and national laboratories.

This is actually a diversification play.  The transaction gives Smith & Wesson entry into the rapidly growing perimeter security market to expand its revenue.  S&W noted that it believes there are opportunities in areas of transportation, railroad crossings, work zone safety, ballistics, law enforcement, energy producing facilities and international markets which not yet addressed.

USR operates primarily in two facilities in Franklin, Tennessee, with a workforce of approximately 110 employees.

The acquisition of USR is expected to close in late July 2009, so it will have no impact on 2009 fiscal earnings.  Revenue for the fourth quarter of fiscal 2009 was $99.5 million, which is $16.4 million, or 20%,higher, than revenue for the comparable quarter a year earlier and gross profit margins improved to 31.0%. Its backlog balance grew to over $200.0 million as of April 30, 2009.  The buyout will include 5.6 million shares at closing and up to 4.1 million shares of common stock depending on USR meeting certain targeted EBITDA for calendar years 2009 and 2010 and  the average price of S&W common stock leading up to the closing date of the transaction.  That is set as $8.8 million to $26.2 million in cash.

Many investors get nervous when companies go make buyouts, but this is a diversifying merger.  It seems investors are happy with the results.  Shares closed up almost 2% at $4.93 and they are up an additional 10% at $5.45 in the after-hours session.  The 52-week range is $1.53 to $7.52.

JON C. OGG
June 18, 2009