Editor’s Note: The original article misspelled Cummins, this article has been corrected.
Generac Holdings Inc. (NYSE:GNRC) is doing two financial transactions of interest currently. First, a private equity fund is selling its shares in a secondary offering. The company is also restricting its debt and paying a $5 per share special dividend in the second quarter – a move seen previously in other industries. Generac’s stock has performed well over the past twelve months, and it has delivered positive results and earnings beats.
Capital Structure Changes
Generac Holdings Inc. (NYSE:GNRC) announced an underwritten secondary offering of nine million shares. CCMP Capital is the selling stockholder of GNRC and will receive all the proceeds from the offering. The company is not selling any shares in the offering. Interestingly, CCMP Capital has set a price above the current price at $37.17 for the shares; currently the shares trade at $36.95. The deal will reduce the ownership of CCMP from 34.4% to 21.2%. CCMP held 52% of the firm in November 2012.
Generac Holdings Inc. (NYSE:GNRC) generates significant free cash flow and, as a result, will pay a special dividend of $5 per share. This is the second year in a row. It has an average FCF yield of 8-10% annually and a $5 dividend is equal to a 13.5% yield. The company is financing the dividend by adding an additional ~$340 million in debt when they refinance. However, a reduced interest rate will offset the increase in outstanding debt. The deal is actually slightly accretive to earnings due to the 200bp reduction in the interest rate.
Generac Holdings Positioned to Benefit from Secular Growth Trends
Generac Holdings Inc. (NYSE:GNRC) is a designer of manufacturer of generators and other engine powered products. Its power equipment serves the residential, light commercial, industrial and construction markets. Generac sells internationally through retailers, wholesalers, equipment rental firms and independent dealers. It holds a 70% market share of US residential generators.
The recovery in the residential market in the US should lead to improving results for Generac Holdings Inc. (NYSE:GNRC). In addition, the residential US market is still developing with a lot of room for further penetration. Management estimates Generac has penetration of 5% on new home construction. Part of the case to own Generac includes the thesis that more homes will add standby power because the aging power grid will be increasingly unreliable and weather patterns will increase the frequency and length of outages. The company also benefits from similar trends in light commercial and industrial, although this market is further along in adopting backup power but still likely relatively early in the process. Additionally, growth will come from international expansion and distribution as well as some new product offerings.