Private-equity firms may be starting a wave of leveraged buyouts that could help companies with strong potential to be acquired perform better than the overall market, according to Deutsche Bank AG’s Bankim Chadha.
Firms have more than $1.5 trillion in purchasing power available to finance deals and possible target companies have cash flow levels that can support debt repayments, New York-based Chadha, the firm’s chief U.S. equity strategist, wrote in a note today. Investors should consider buying a basket of 50 stocks, including Gap Inc. and Symantec Corp., deemed the top potential LBO candidates in the Standard & Poor’s 1500 Index, he said.
Global merger and acquisition activity has picked up this year, increasing 22 percent by dollar value to $1.04 trillion compared with the same period in 2010, Bloomberg data show. Companies are beginning to spend their record cash hoards and take on debt after credit markets dried up following the 2008 stock-market rout. The availability of financing and low rates, along with corporate free cash flow and sales growth potential mean private-equity deals will follow, Chadha says.
“We think conditions are very supportive of an up cycle in LBOs,” Chadha wrote. “Credit markets are robust, equity valuations look attractive, and corporate fundamentals strong.”
Below are Chadha’s top 50 potential LBO candidates: Alaska Air Group Inc. (ALK US) American Eagle Outfitters Inc. (AEO US) American Electric Power Co. (AEP US) American Greetings Corp. (AM US) AmSurg Corp. (AMSG US) Apollo Group Inc. (APOL US) Bristow Group Inc. (BRS US) Buckeye Technologies Inc. (BKI US) CA Inc. (CA US) Career Education Corp. (CECO US) Century Aluminum Co. (CENX US) Ceradyne Inc. (CRDN US) Cigna Corp. (CI US) Comtech Telecommunications Corp. (CMTL US) Dolan Co. (DM US) DST Systems Inc. (DST US) Entergy Corp. (ETR US) Entertainment Properties Trust (EPR US) Fair Isaac Corp. (FICO US) Fiserv Inc. (FISV US) Forest Laboratories Inc. (FRX US) Gannett Co. (GCI US) Gap Inc. (GPS US) Jakks Pacific Inc. (JAKK US) JDA Software Group Inc. (JDAS US) KapStone Paper and Packaging Corp. (KS US) KLA-Tencor Corp. (KLAC US) Kohl’s Corp. (KSS US) Lender Processing Services Inc. (LPS US) Lexmark International Inc. (LXK US) Micron Technology Inc. (MU US) National Presto Industries Inc. (NPK US) Northrop Grumman Corp. (NOC US) OM Group Inc. (OMG US) Oplink Communications Inc. (OPLK US) Oshkosh Corp. (OSK US) Pinnacle West Capital Corp. (PNW US) Progress Software Corp. (PRGS US) Raytheon Co. (RTN US) Seacor Holdings Inc. (CKH US) STR Holdings Inc. (STRI US) Superior Industries International Inc. (SUP US) Symantec Corp. (SYMC US) Synopsys Inc. (SNPS US) Tessera Technologies Inc. (TSRA US) UniFirst Corp. (UNF US) ViroPharma Inc. (VPHM US) Vishay Intertechnology Inc. (VSH US) Warnaco Group Inc. (WRC US) Western Digital Corp. (WDC US)