The Next Mergers & Buyouts For 2012

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Best Buy Co., Inc. (NYSE: BBY) is caught between a rock and a hard place.  The electronics retailer has a core business under attack from Amazon.com Inc. (NASDAQ: AMZN) and many other online retail efforts.  Still, shares have been cut in half in less than two years.  The company’s founder Richard Schulze has a 21% stake and his resignation from the company now puts him as the prime buyout leader.  Schulze is reportedly speaking with investment bankers and possibly with private equity firms over how to deal with his stake.  Some analysts believe that Schulze will buy the company, and some disagree.  At $21.00, Best Buy now trades at less than 6-times earnings.  If investors think that Schulze can magically pay $35 or $40 here just because that is where the stock was in 2010, let’s just say that they need a dose of reality.  The current value is $7.1 billion, or about $5.6 billion for the non-Schulze stake.  A price of $28.00 would not even generate a valuation of 8-times earnings, but we would caution that analysts have a consensus price target objective of almost $23.00.

Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) is a coffee giant where the shares literally went through the roof and up the moon.  Gravity and reality kicked in, and suddenly Green Mountain finds itself as one of the worst performing big stocks out there.  Rumors have been out that partner Starbucks Corporation (NASDAQ: SBUX) could make a move to acquire the company.  A longer-dated ‘rumor’ search has also shown that Nestle and McDonald’s Corporation (NYSE: MCD) could be suitors.  Even though shares are down about 75% of the peak, the $21.78 price compares to a 52-week range of $19.45 to $115.98 and Thomson Reuters has a consensus price target above $50.00 still.  Would Starbucks even be able to get this deal done on an antitrust basis?  Who knows.  We would warn that if no buyout is announced that the growth here is compressing rapidly and how the stock can turn itself around rapidly seems a bit mystical.

Huntsman Corporation (NYSE: HUN) is back in the world of M&A, at least that is what the most recent belief has been from private equity reports.  Apollo Global Management, LLC (NYSE: APO) originally tried to buy this chemicals player back during the private equity boom but it backed off and paid a huge penalty after walking away. The recently reported chatter was that Bank of America Corporation (NYSE: BAC), via BofA/ML, has reached out to KKR & Co. (NYSE: KKR) and other private equity firms to see what interest there would be. Huntsman trades at only about 6-times 2012 and 2013 earnings estimates and the value today is far less than when it was going to be acquired the first time around.  Shares are worth $3.1 billion with a share price of almost $13.00 now, but Wall Street analysts on the Thomson Reuters consensus price target value Huntsman at just over $16.25 per share. If the old buyout valuations or if the same relative valuation as peers would apply, Huntsman could easily be worth more than $20 per share to the right buyer.

RailAmerica, Inc. (NYSE: RA) could be the next railroad target if trade-journal reports are anywhere close to being accurate. A report in late-May from the Jacksonville Business Journal quoted Trains Magazine noting that Fortress Investment Group LLC (NYSE: FIG)  is looking to sell its majority stake in RailAmerica and the report seemed to indicate that perhaps Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) could be interested.  The value is only $1.2 billion today, but we would note that this stock is up more than 60% year to date. The $24.20 share price compares to a 52-week range of $11.06 to $24.73 and the Thomson Reuters consensus price target is $24.95.  Shares were recently at $21.50 or so before the buyout chatter started to come into play and we do not have a great handle for what this short-line and regional freight railroad could fetch from peers above its valuation of 18-times expected earnings.

SUPERVALU Inc. (NYSE: SVU) is a grocer and retailer which has just seen its value erode and erode over the last five years as the company is now losing money from operations. This is a story where value became a value trap as the shares slid from over $40 to about $5 and determining the true value today is highly subjective. Despite the move to Wal-Mart Stores Inc. (NYSE: WMT) and other stores, the market value of $1.1 billion is a bit misleading because of its huge long-term debt balance of about $6 billion.  Its sales have been in decline and were $36 billion this last year and are expected to be $34.6 billion this year.  Understanding who would acquire this company is hard to pinpoint because of the high debt load.  Still, the recent trading activity in SUPERVALU shares is indicating some loose interest in a sector ripe for further consolidation.  Thomson Reuters has a consensus price target of only $6.75 versus a $5.18 price now and its 52-week range is $4.05 to $9.71.

Lastly, we would like to bring up the merger that was that blew up which needs to be rekindled. MetroPCS Communications, Inc. (NYSE: PCS) and Leap Wireless International Inc. (NASDAQ: LEAP) were supposed to merge together before but the two sides could not come to an amicable agreement.  Now both companies have been speculated about as targets by larger wireless players, and we recently voted MetroPCS as a brand which could disappear in 2013 due to a buyout.  It is likely that either player could be acquired, but these two companies could come back together in a quasi merger of equals so that it does not wipe out shareholder values while the combined effort could try to cut costs and drive savings in a turnaround for shareholders who are way down and out today.  Rather than Sprint Nextel Corporation (NYSE: S) or Deutsche Telecom via T-Mobile putting one of these two at a disadvantage, these two companies should really reconsider how they can merger together to consolidate costs.

Of course it is safe to assume that not all of these deals will be announced.  It is even possible that none of these may come about as mergers.  Still, we have just seen the M&A news pick up and these companies have all recently been a part of the rumor mill.

JON C. OGG

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