Handicapping The LBO Stakes

Private-equity firms are eyeing companies with flat stock prices, low earnings valuations, and heavy debt. Here's who is on one analyst's list

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.


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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