LBO screen for S&P500: plenty to think about

Transcription

1 LBO screen for S&P500: plenty to think about With the cost of US corporate debt falling and rumoured deal activity rising, a simple LBO screen highlights the large number of candidates in the US where an indicative IRR of over 12% can be achieved at a 30% premium to current stock prices. We highlight a list names in the US as a starting point for further work. Recent reports have highlighted the amount of cash which private equity funds have available to invest, over $1tn in total, of which $200bn is from 2007 and 2008 vintage funds which needs to be deployed in the next twelve months. This comes at a time when we have seen investors search for yield drive record demand for high yield bonds (see next page), suggesting that for the right deals there is likely to be debt financing available. While we have yet to see a significant pick up in M&A activity generally, and financial sponsor M&A more specifically, this does suggest that we could see a pick up going forward. Furthermore, the recent increase in rumoured activity, even if this has yet to translate to announced deals, does suggest more may be going on behind the scenes than has done previously. In light of this back-drop we thought it useful to screen for potential LBO candidates in order to, at the very least, provide some food for thought. We have kept this pretty simple at this stage, seeking to identify potential candidates which fit the main criteria that drive returns in an LBO, i.e. growth and cash flow generation. We have made some broad assumptions on the premium paid, capital structure, tax and interest rates to derive an indicative LBO return, and have used these and a range of other criteria to screen for potential candidates. The list contained in this report shows the results of this screen and while we will look to do more work to refine it further, we thought it a useful starting point to highlight plausible candidates from an LBO perspective. This list simply a screen, not a basket, and there are several names which look attractive from an LBO point of view with very high IRRs but we are very sceptical about the prospects of any deals actually taking place. See more detail on the next page. Assumptions Bid premium: 30% Debt/Equity split: 60/40 Cost of debt: 7.5% Tax rate: 30% Screen excludes Financials and resources sectors Loss-making companies Companies with a free cash flow yield of less than 5% Stocks with EV of under 2bn or over $10bn Stocks with an indicative IRR of less than 12% Page 1 of 6

2 We are doubtful about the following Best Buy: There is no reason to ever go into a BBY anymore to actually purchase anything unless you need it right away. It is essentially a showroom for AMZN. People go into BBY, play with the product, and then go to AMZN to buy it (CHEAPER). The older generations (parents, grandparents) who are less tech savvy will phase out and younger (US) adults who are more price sensitive consumers emerge, you should see a slow bleed. Think RadioShack and Circuit City. Electronic Arts: No one can figure out why this company can t succeed and gain a foothold in mobile and social gaming. Why I m hesitant is because the company management themselves don t seem to know why things aren t working either (how can an acquirer know more than long term CEO to right the ship). Not worth the hassle. GameStop: Same theory as above. First, there are NFLX type rental services that require less purchases. Additionally, consumers are migrating towards smaller and cheaper casual games via mobile (ZNGA, EA). GME model is obsolete and it will be hard to reverse the trend. A reliance on hardware innovation Sadly, they are not in control of their own destiny. Staples: Europe is broken for them, lots of charges and store-closings coming. US office market is also shrinking as other technology alternatives emerge. Value trap. Has to get much cheaper first, something to monitor. Page 2 of 6

3 Cost of corporate debt in the US: going lower Yields on Junk Bonds are at the long term lows... and following Investment Grade yields which continue to move lower. Page 3 of 6

4 In alphabetical order Prices as at Wednesday 17 th October 2012, valuation multiples are FactSet consensus 2012, is Name Mkt cap ($m) EV ($m) EV/Sales EV/ P/E FCF Yield Net debt / Margin Sales Abercrombie & Fitch Co. Cl A 2,684 2, x 3.8x 10.7x 7% -0.9x 13% 7% 10% 16.5% Airgas Inc. 6,404 8, x 8.8x 14.8x 5% 2.0x 19% 7% 13% 15.7% Altera Corp. 10,682 7, x 12.0x 16.1x 5% -4.3x 36% 13% 20% 21.4% Analog Devices Inc. 11,816 8, x 9.1x 15.7x 5% -3.3x 35% 8% 15% 16.7% Autodesk Inc. 7,306 5, x 8.6x 14.7x 7% -2.6x 28% 8% 11% 17.5% Avery Dennison Corp. 3,158 4, x 7.0x 13.0x 8% 1.8x 10% 4% 5% 12.1% Best Buy Co. Inc. 5,922 6, x 2.3x 5.7x 24% 0.1x 6% 0% -2% 34.5% BMC Software Inc. 6,559 5, x 6.4x 10.9x 10% -1.3x 38% 4% 2% 14.6% Coventry Health Care Inc. 5,838 5, x 7.0x 13.2x 9% -0.1x 6% 7% 8% 17.5% Dean Foods Co. 3,135 6, x 7.5x 12.9x 10% 3.9x 7% 3% 5% 13.0% Electronic Arts Inc. 4,416 2, x 4.2x 11.2x 7% -2.5x 16% 7% 10% 16.7% Expedia Inc. 7,375 7, x 9.3x 15.3x 9% -0.2x 20% 10% 12% 21.7% Expeditors International 7,485 6, x 10.2x 18.6x 5% -2.2x 10% 11% 13% 14.6% F5 Networks Inc. 7,692 6, x 11.9x 18.8x 6% -1.9x 40% 16% 17% 19.9% FLIR Systems Inc 2,967 2, x 7.1x 12.6x 8% -0.6x 27% 4% 9% 17.1% GameStop Corp. Cl A (Class A) 2,831 2, x 2.5x 6.7x 15% -0.9x 9% 3% 1% 29.1% Gannett Co. Inc. 4,394 6, x 5.3x 8.4x 14% 1.5x 22% 1% 3% 18.6% Harman International Industries 2,981 2, x 6.0x 11.7x 7% -1.0x 10% 8% 18% 24.2% Harris Corp. 5,338 7, x 5.7x 9.2x 14% 1.4x 23% 0% -2% 13.2% Humana Inc. 12,098 9, x 4.8x 9.6x 11% -1.2x 5% 8% 12% 28.3% Interpublic Group Of Cos. 4,878 4, x 4.7x 11.3x 10% -0.7x 13% 5% 10% 23.0% Jacobs Engineering Group Inc. 5,310 4, x 6.9x 12.3x 6% -0.8x 6% 10% 10% 13.1% KLA-Tencor Corp. 7,615 6, x 5.5x 11.2x 12% -1.2x 36% 4% 3% 19.9% Lam Research Corp. 5,955 4, x 9.1x 14.6x 7% -3.9x 17% 26% 38% 43.3% Linear Technology Corp. 7,419 6, x 10.6x 17.8x 8% -0.8x 51% 8% 10% 17.9% LSI Corp. 3,752 3, x 5.4x 8.6x 6% -1.0x 23% 7% 12% 16.2% Microchip Technology Inc. 6,299 5, x 9.8x 14.5x 5% -2.0x 33% 11% 13% 14.0% NetApp Inc. 10,863 6, x 5.1x 12.1x 10% -3.8x 19% 8% 10% 25.7% NVIDIA Corp. 8,090 4, x 4.7x 12.3x 6% -4.1x 21% 6% 13% 16.3% Pentair Ltd. 4,330 5, x 8.1x 13.7x 8% 1.9x 15% 37% 30% 37.0% PerkinElmer Inc. 3,471 4, x 10.2x 13.3x 7% 1.4x 19% 5% 9% 14.0% PulteGroup Inc. 6,693 8, x 27.8x 19.1x 7% 6.1x 6% 25% 65% 70.2% Robert Half International Inc. 3,653 3, x 8.2x 14.5x 6% -0.7x 10% 9% 16% 19.7% Safeway Inc. 3,926 9, x 4.3x 7.8x 23% 2.4x 5% 2% 0% 18.2% Sealed Air Corp. 3,161 7, x 7.8x 12.2x 11% 4.6x 12% 2% 5% 13.7% Snap-On Inc. 4,318 4, x 8.5x 13.3x 7% 1.1x 20% 4% 8% 13.3% Staples Inc. 7,909 8, x 4.1x 8.1x 13% 0.2x 8% 0% 1% 17.5% Textron Inc. 6,993 8, x 6.0x 10.8x 8% 1.2x 12% 4% 11% 17.3% Total System Services Inc. 4,408 4, x 7.7x 16.3x 7% -0.5x 33% 13% 7% 12.7% TripAdvisor Inc. 4,425 4, x 12.2x 17.4x 5% -0.8x 45% 18% 17% 18.3% VeriSign Inc. 7,659 7, x 14.0x 21.9x 5% -0.8x 59% 10% 11% 13.6% Western Digital Corp. 8,961 7, x 2.5x 4.0x 26% -0.4x 25% 11% 1% 49.6% Wyndham Worldwide Corp. 7,826 9, x 9.4x 15.1x 9% 2.0x 23% 5% 7% 15.3% Xilinx Inc. 8,903 7, x 11.3x 15.9x 6% -1.5x 31% 8% 14% 18.0% Xylem Inc. 4,655 5, x 8.3x 12.9x 7% 1.0x 17% 5% 6% 12.0% Implied IRR Source: FactSet estimates Page 4 of 6

5 In IRR order Prices as at Wednesday 17 th October 2012, valuation multiples are FactSet consensus 2012, is Name Mkt cap ($m) EV ($m) EV/Sales EV/ P/E FCF Yield Net debt / Margin Sales PulteGroup Inc. 6,693 8, x 27.8x 19.1x 7% 6.1x 6% 25% 65% 70.2% Western Digital Corp. 8,961 7, x 2.5x 4.0x 26% -0.4x 25% 11% 1% 49.6% Lam Research Corp. 5,955 4, x 9.1x 14.6x 7% -3.9x 17% 26% 38% 43.3% Pentair Ltd. 4,330 5, x 8.1x 13.7x 8% 1.9x 15% 37% 30% 37.0% Best Buy Co. Inc. 5,922 6, x 2.3x 5.7x 24% 0.1x 6% 0% -2% 34.5% GameStop Corp. Cl A (Class A) 2,831 2, x 2.5x 6.7x 15% -0.9x 9% 3% 1% 29.1% Humana Inc. 12,098 9, x 4.8x 9.6x 11% -1.2x 5% 8% 12% 28.3% NetApp Inc. 10,863 6, x 5.1x 12.1x 10% -3.8x 19% 8% 10% 25.7% Harman International Industries 2,981 2, x 6.0x 11.7x 7% -1.0x 10% 8% 18% 24.2% Interpublic Group Of Cos. 4,878 4, x 4.7x 11.3x 10% -0.7x 13% 5% 10% 23.0% Expedia Inc. 7,375 7, x 9.3x 15.3x 9% -0.2x 20% 10% 12% 21.7% Altera Corp. 10,682 7, x 12.0x 16.1x 5% -4.3x 36% 13% 20% 21.4% KLA-Tencor Corp. 7,615 6, x 5.5x 11.2x 12% -1.2x 36% 4% 3% 19.9% F5 Networks Inc. 7,692 6, x 11.9x 18.8x 6% -1.9x 40% 16% 17% 19.9% Robert Half International Inc. 3,653 3, x 8.2x 14.5x 6% -0.7x 10% 9% 16% 19.7% Gannett Co. Inc. 4,394 6, x 5.3x 8.4x 14% 1.5x 22% 1% 3% 18.6% TripAdvisor Inc. 4,425 4, x 12.2x 17.4x 5% -0.8x 45% 18% 17% 18.3% Safeway Inc. 3,926 9, x 4.3x 7.8x 23% 2.4x 5% 2% 0% 18.2% Xilinx Inc. 8,903 7, x 11.3x 15.9x 6% -1.5x 31% 8% 14% 18.0% Linear Technology Corp. 7,419 6, x 10.6x 17.8x 8% -0.8x 51% 8% 10% 17.9% Autodesk Inc. 7,306 5, x 8.6x 14.7x 7% -2.6x 28% 8% 11% 17.5% Coventry Health Care Inc. 5,838 5, x 7.0x 13.2x 9% -0.1x 6% 7% 8% 17.5% Staples Inc. 7,909 8, x 4.1x 8.1x 13% 0.2x 8% 0% 1% 17.5% Textron Inc. 6,993 8, x 6.0x 10.8x 8% 1.2x 12% 4% 11% 17.3% FLIR Systems Inc 2,967 2, x 7.1x 12.6x 8% -0.6x 27% 4% 9% 17.1% Electronic Arts Inc. 4,416 2, x 4.2x 11.2x 7% -2.5x 16% 7% 10% 16.7% Analog Devices Inc. 11,816 8, x 9.1x 15.7x 5% -3.3x 35% 8% 15% 16.7% Abercrombie & Fitch Co. Cl A 2,684 2, x 3.8x 10.7x 7% -0.9x 13% 7% 10% 16.5% NVIDIA Corp. 8,090 4, x 4.7x 12.3x 6% -4.1x 21% 6% 13% 16.3% LSI Corp. 3,752 3, x 5.4x 8.6x 6% -1.0x 23% 7% 12% 16.2% Airgas Inc. 6,404 8, x 8.8x 14.8x 5% 2.0x 19% 7% 13% 15.7% Wyndham Worldwide Corp. 7,826 9, x 9.4x 15.1x 9% 2.0x 23% 5% 7% 15.3% Expeditors International 7,485 6, x 10.2x 18.6x 5% -2.2x 10% 11% 13% 14.6% BMC Software Inc. 6,559 5, x 6.4x 10.9x 10% -1.3x 38% 4% 2% 14.6% Microchip Technology Inc. 6,299 5, x 9.8x 14.5x 5% -2.0x 33% 11% 13% 14.0% PerkinElmer Inc. 3,471 4, x 10.2x 13.3x 7% 1.4x 19% 5% 9% 14.0% Sealed Air Corp. 3,161 7, x 7.8x 12.2x 11% 4.6x 12% 2% 5% 13.7% VeriSign Inc. 7,659 7, x 14.0x 21.9x 5% -0.8x 59% 10% 11% 13.6% Snap-On Inc. 4,318 4, x 8.5x 13.3x 7% 1.1x 20% 4% 8% 13.3% Harris Corp. 5,338 7, x 5.7x 9.2x 14% 1.4x 23% 0% -2% 13.2% Jacobs Engineering Group Inc. 5,310 4, x 6.9x 12.3x 6% -0.8x 6% 10% 10% 13.1% Dean Foods Co. 3,135 6, x 7.5x 12.9x 10% 3.9x 7% 3% 5% 13.0% Total System Services Inc. 4,408 4, x 7.7x 16.3x 7% -0.5x 33% 13% 7% 12.7% Avery Dennison Corp. 3,158 4, x 7.0x 13.0x 8% 1.8x 10% 4% 5% 12.1% Xylem Inc. 4,655 5, x 8.3x 12.9x 7% 1.0x 17% 5% 6% 12.0% Implied IRR Source: FactSet estimates Page 5 of 6

6 Sales-Trading Sales Research This note is circulated to you as a client of Aviate Global LLP. Please note that the views contained within may have been disclosed earlier today to some clients via Bloomberg. If you would like to receive our earlier Bloomberg message, please contact Paul Moran on Aviate Global LLP generates high conviction trading and investment ideas for its clients. It does not carry out any proprietary trading or corporate advisory activities. Aviate Global s publications are for the sole benefit of its clients. Unauthorised copying or distribution is prohibited. Aviate Global LLP is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. Registered in England and Wales No. OC NOTICE TO U.S. INVESTORS This report is issued and approved for distribution in the United Kingdom by Aviate Global LLP. Aviate Global LLP is authorised and regulated by the United Kingdom Financial Services Authority (FSA authorisation number ). This report has been prepared by Aviate Global LLP solely for the purpose of supplying information to the clients of Aviate Global LLP and/or its affiliate(s) to whom it is distributed. This report is not, and should not be construed as, a recommendation, solicitation or offer to buy or sell any securities or related financial products. This report does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it. This report has not been prepared, reviewed or approved by Aviate Global LP, Aviate Global LLP s affiliated U.S.-registered broker-dealer and a member of FINRA. This report is intended to be distributed by Aviate Global LLP in the United States solely to major U.S. institutional investors as defined by Rule 15a-6 of the Securities Exchange Act of 1934, as amended. For the avoidance of doubt, this report is not intended for individual or non-institutional investors and should not be distributed to any such individual or entity. Interested major U.S. institutional investors should contact Aviate Global, LP, our U.S. registered broker-dealer affiliate, or another U.S.-registered broker-dealer, to effect transactions in the securities that are the subject of this report. Aviate Global LP also is registered as an Introducing Broker with the National Futures Association (NFA ID ). Aviate Global LP does not deal with or for U.S. persons that do not meet the definition of an Eligible Contract Participant (as defined in the U.S. Commodity Exchange Act). Page 6 of 6