An LBO at Gateway?

Onetime highflier Gateway (GTW ), second only to Dell Computer in direct PC sales, has lost a lot of altitude. Trading at 75 in 2000, Gateway has since crashed--to 3.15 on Sept. 11. In the past month alone, the stock has fallen 24%. Eroding demand and a poor pricing environment have crimped profit margins.

So why are some hedge funds loading up on Gateway? They've heard whispers that an investor group has talked to CEO Ted Waitt, who owns 31% of the stock, about a leveraged buyout. One pro close to the situation and buying says the group puts the buyout value at 5 a share, or $1.6 billion. But what's the attraction? Gateway posted a loss in 2001 and expects another this year.

One big come-on: Gateway's $1 billion cash hoard, which translates to $3 a share. And Gateway, even though revenues have skidded for six quarters, has positive cash flow and has no debt. "With Gateway way down and selling close to its cash levels, a buyer is getting the assets for almost nothing," says a fund manager who's buying shares.

One analyst with a buy rating on Gateway based on its turnaround prospects is Kimberly Alexy of Prudential Securities, who says the company's "business is tracking at or close to its recovery plan." The analyst figures Gateway will earn 8 cents a share in 2003 on sales of $5 billion, up from an estimated $4.4 billion in 2002. Alexy has a stock price target of 7 a share, based on its net cash and a projected 25% jump in 2003 sales. Gateway declined comment.

By Gene G. Marcial

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