The Leveraged Buyout Target List

Oy, the LBO’s are back.  Blackstone (BX) just shattered their earnings expectations this quarter, business is getting good again and dealmaking has returned.  I jokingly refer to private equity guys as moles and Morlocks, but I know a few of them in real life and they genuinely believe that they are more than just undertakers and graverobbers.

Anyway, leaving aside the philosophical debate about the need for so much PE, let’s have the more interesting discussion about which stocks might be the next targets for the KKRs and the Blackstones.

Barron’s looks at a list compiled recently…

What companies could be the next targets? Randy Udell and Ben Canet of the UBS U.S. special-situations equities sales team, recently listed 27 potential targets. Two prior lists, published in March and July 2010, had a good hit ratio of LBOs and other takeovers, such as King Pharmaceuticals, bought by Pfizer in March.

Before the picks themselves, a word on their methodology:

The UBS duo created the list by screening for multiple financial and business criteria. Among the assumptions is that private equity could offer at least a 15% premium above the stock price and that total debt of the privatized target can be no more than six times 2010 cash flow…

They assume a 30% equity contribution and that the total LBO size not exceed $15 billion because it can be tough to finance large deals. They also figure that buyers can generate a 15% annual return.

The list is laden with retailers like Limited, RadioShack (what else is new), Aeropostale, and Ross Stores.  This is unsurprising as multiples have been compressed for this group for ages.  It should be noted, however, that some of the most disastrous PE deals of the last cycle were retailers (Linens & Things anyone?).

Head over below to see all 27 names UBS came up with.

Source:

LBO Hunt: Who’s Next (Barron’s)