After years of fund raising, private-equity funds “are awash in capital,” according to Bain’s 2019 private-equity report. That means they have to find things to spend their cash on.
That won’t surprise investors who have been watching the market. Take Walgreens Boots Alliance (ticker: WBA): The $70-plus billion drugstore chain is up 15% over the past month on reports that it could get bought out by the legendary private-equity firm KKR (KKR). The question now is, who’s next?
It’s tempting to run sophisticated screens looking at factors that attract private-equity investors, such as management age (perhaps a retirement is pending and no succession plan is in place) or lower-than-average profit margins. Maybe an outlier can be identified with a large opportunity for cost-cutting. Screening for weak stock performance versus peers, which can leave assets trading at a discount, is another trick of the trade. And unhappy investors are more willing to consider takeover offers.
But there is a better way to narrow the universe of potentially attractive private-equity targets: Just look at what private-equity firms have bought lately. Another shortcut is to ask an expert or two—people who specialize in special situations. Barron’s did both.
Electronics distributor Tech Data (TECD) just announced a go-private deal with Apollo Global Management (APO), and electrical-component distributor Anixter International (AXE) signed a buyout deal with Clayton, Dubilier & Rice.
Arrow Electronics (ARW) and Avnet (AVT) are two other electrical distributors that could attract interest. They trade for less than 14 times estimated next year’s earnings and have below-average one- and five-year stock returns—two factors that could attract private-equity players.
Clayton, Dubilier & Rice also bought residential construction-material distributor Ply Gem a couple of years back. And aerospace distributor Wesco Aircraft Holdings (WAIR) is being purchased by Platinum Equity.
It appears that private equity likes distribution. It might be because capital-spending requirements are low in the industry. What’s more, it’s fragmented, creating an opportunity to buy more distributors to build scale.
Beacon Roofing Supply (BECN) and Wesco International (WCC) are distributors similar to those previously purchased. They trade for less than 12 times next year’s estimated earnings and have below-average one-year stock returns.
Private-equity firms have been expressing interest in more than just distribution. Hilton Grand Vacations (HGV) might go private. There are other vacation rental companies similar to Hilton, such as Wyndham Destinations (WYND). And Apollo has approached TV station owner Tegna (TGNA). That could mean other media properties are in play. Tegna spun out of USA Today owner Gannett (GCI).
Experts are an even more valuable source of ideas. Gordon Haskett analyst Don Bilson—whose patch is special situations, looking for clues in areas that fundamental analysts don’t pay attention to—has one: Molson Coors Brewing (TAP).
Bilson ticks off four items: Molson updated its change-of-control provisions, and appointed a new CEO from within the organization. The Coors family has ties to private equity firm TPG, and TPG recently hired an ex-Coors CEO.
Molson checks other PE boxes. Its shares have had a tough go so far in 2019, falling 6.5%, to close on Friday at $52.52. And the stock trades for less than 13 times earnings.
Does it look like a bargain? Maybe. It’s important to remember, however, that the likelihood of being right on any takeover guess is low. That means investors better like the stocks selected for fundamental reasons. A private equity-led buyout should be the icing on the cake. Remember Walgreens? Its shares are still down about 10% this year even after the deal-related bounce.
The next question: What company would replace Walgreens in the Dow Jones Industrial Average? Walgreens—one of the 30 Dow stocks—replaced General Electric (GE) in 2018. GE was an original member looking back to 1896. Maybe S&P Dow Jones Indexes will go back to an old flame.
Source: Barron’s
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