Magazine

Handicapping The LBO Stakes


This might turn out to be the year of the leveraged buyout. Through March, deals worth more than $45 billion were completed -- nearly half the amount for all of 2005. According to Louise Purtle, a strategist at New York-based independent research shop CreditSights Ltd.: "There is no end in sight."

Private-equity funds have collected billions in recent years and are itching to deploy their cash. The main targets: companies with flat stock prices, low earnings valuations, and heavy debt.

EVER-BIGGER PREY

Creating a list of LBO candidates isn't easy in this go-go environment, says Purtle, since no price appears to be too high, and the prey keeps getting larger: Witness the $14 billion April sale of a majority stake in General Motors Acceptance Corp. (GMAC) to a group of private-equity investors. Purtle took a stab at identifying buyout bait using a three-step process that started with the Standard & Poor's 1500-stock index.

First, she eliminated companies that fall into the bottom 25% in terms of a valuation measure called EV/EBITDA (or enterprise value to earnings before interest, taxes, depreciation, and amortization), which helps normalize the results across sectors that carry higher or lower price-earnings ratios. Next, she tossed out companies that outperformed the S&P 1500 Index's total return in the 12 months ended in early March. Then she cut those with market values greater than $10 billion, companies still considered too big to be bagged easily. She was left with 204; the biggest 25 are listed at right.

Plenty of well-known investment-grade companies from a broad swath of sectors made the list. Of course, these are just potential targets based on fundamentals. But with Wall Street dying to dig its mitts into the private-equity war chest and pull out advisory fees, you can bet more big deals will come, and soon.

By Mara Der Hovanesian


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