By Richard Beddard | Tue, 25th June 2013 - 11:55
Sprue Aegis is a strong company at an attractive price but there is kink in the story. After a call with Sprue’s financial director, I may have straightened it out.

The kink is the relationship between smoke and carbon monoxide detector supplier Sprue and its major supplier, BRK Brands. BRK, A US company, supplies the BRK, FireAlert, and Dicom brands for Sprue to sell in the UK and Europe alongside its own FireAngel brand.

Earlier this year, BRK’s parent company Jarden approached Sprue with a takeover offer, but was rebuffed by the directors. When Jarden subsequently made the offer directly to shareholders, a majority, including directors, indicated they would vote against it because, at 90p a share, it significantly undervalued the company. The bid lapsed, and the shares currently trade around 90p.

The accounts for 2012 show Sprue is highly profitable and without debt, and the board’s defence documents indicate it has good growth prospects in the UK where it has recently become sole supplier to B&Q, British Gas, and Baxi, and in Europe, where it already earns over 30% of revenue. It’s the kind of company I want in the Share Sleuth portfolio, focused on designing and supplying superior products (or services) in a well defined niche, which it may already dominate in the UK retail channel.

The kink is that Jarden had warned it would reconsider the distribution agreement with Sprue should the bid fail, when it expires in 2015. The board is sanguine about the loss of their main supplier, which I guessed meant either they felt they could replace BRK’s products with their own, or they thought BRK was bluffing.

Since Sprue paid over £14m to Jarden in 2012 and Sprue’s turnover was £37m, sales of products sourced from Jarden look significant. I asked John Gahan, Sprue’s financial director, why the board is so relaxed about the threat to end the agreement.

He told me an increasing amount of the money paid to Jarden each year is not spent on BRK brands, but on Sprue’s FireAngel products manufactured in China by a factory owned by Jarden under a twelve month supply contract. Sprue can terminate that contract and switch production to another manufacturer relatively easily, and although the transition would involve some expense,…

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