Wednesday, February 21, 2007

Citigroup Dicusses 11 Possible LBO Targets

Citigroup issued a report discussing 11 LBO ideas.
Analog Devices (NYSE: ADI): the firm said, "ADI has LBO/divestiture and LBO/re-IPO value creation potential because it has partitioned business segments with mismatched profitability."

Maxim Integrated Products (Nasdaq: MXIM): the firm said, "We view Maxim Integrated as a possible transaction candidate given its scale, the unusual stability and quality of its free cash flow."

Bearingpoint Inc. (NYSE: BE): the firm said, "A transaction is unlikely until after BE catches up on its S.E.C. filings, which is anticipated to be a 3Q07 event." Also said, "We assume a take-out price of $12, consistent with our target price."

DST Systems (NYSE: DST): the firm said, "we believe the company's high level of recurring revenue and valuable investment portfolio makes it an appropriate candidate for this list. Assuming at per share takeout price of $91, which represents an approximate 25% premium to current levels, our LBO analysis reveals a potential 25% IRR."

First Data Corp. (NYSE: FDC): the firm said, "We believe that Buy-Rated FDC represents a more interesting LBO possibility following its recent spin-off of Western Union (WU) than its screen rank of 52 might otherwise indicate"

Fair Isaac Corp. (NYSE: FIC): the firm said, "Our decision to consider FIC as a top LBO candidate is based more on our qualitative view of the business than the quantitative valuation factors."

Credence Systems Corp. (Nasdaq: CMOS): the firm said, "... while we rate shares of CMOS Hold (2S) with a $5 price target given our view of back-end fundamentals and near-term risk from a big "air-pocket" in orders from major customer AMD, we believe the potential for further restructuring provides sufficient leverage in the model longer-term for a private equity interest. Assuming a 20% takeout premium (or a buyout price of roughly $6/share)."

KLA Tencor (Nasdaq: KLAC): the firm said, "... believe the potential for further restructuring (already planned) provides sufficient leverage in the model longer-term for private equity interest. Assuming a 20% takeout premium (or a buyout price of roughly $60/share), our proprietary model suggests KLAC would generate an IRR of 35%."

Cypress Semiconductor (NYSE: CY): the firm said, "Although Cypress Semiconductor (2S) did not rank highly in our initial quantitative screening, we believe that it has the potential for an LBO or changes in capital structure for three main reasons (a) Management has expressed strong willingness to consider an LBO (b) IRR analysis on the core Cypress business (excluding SunPower) yielded a return of 24% which is above the industry specific hurdle rate of 20% and (c) We believe that there is room for operational improvements that can drive increases in gross margin, independent of an LBO transaction."

Check Point Software Technologies Ltd. (Nasdaq: CHKP): the firm said, "We think the company would make an attractive LBO/private equity candidate due to: Strong balance sheet with over $1B in net cash representing almost 20% of market cap; Relatively low valuation, CHKP trades at a P/E of ~16x CY07 EPS vs an average P/E of ~21x for our software coverage universe; Stable cash flow generation; CHKP has generated ~350M in operating cash flow each of the last two years and has a stable base of customers with high renewal rates."

Plantronics (NYSE: PLT): the firm said: "We think that Plantronics is a good candidate for a leveraged buy-out ... Our analysis suggests that a LBO would produce a 32% IRR for the equity sponsors and management even with a take-out premium of 25% versus the current stock price."

The firm also said despite scoring in the top 20 of their LBO scorecard, they have chosen not toinclude the following stocks as likely LBO candidates: National Semiconductor Corp. (NYSE: NSM), RF Micro Devices Inc. (Nasdaq: RFMD), Skyworks Solutions Inc. (Nasdaq: SWKS), QLogic Corp. (Nasdaq: QLGC), Western Digital Corp. (NYSE: WDC), Komag Inc. (Nasdaq: KOMG), Motorola Inc. (NYSE: MOT), Palm, Inc. (Nasdaq: PALM), Commscope Inc. (NYSE: CTV), Electronics for Imaging, Inc. (Nasdaq: EFII), Novellus Systems Inc. (Nasdaq: NVLS), Intersections Inc. (Nasdaq: INTX), Global Payments Inc. (NYSE: GPN), ECI Telecom Ltd. (Nasdaq: ECIL), Bisys Group Inc. (NYSE: BSG), Gateway Inc. (NYSE: GTW), Mattson Technology Inc. (Nasdaq: MTSN), LAM Research Corp. (Nasdaq: LRCX), McAfee Inc. (NYSE: MFE), Netflix, Inc. (Nasdaq: NFLX).

The firm also said, "While we do not expect any of our 15 covered companies in the EMS, Connector,Distributor, and Passive segments to go private via an LBO or private equity, we do foresee Sanmina (Nasdaq: SANM) likely undergoing a significant recapitalization of it is capital structure."

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