Let’s forget about the hype around LBO’s, MBO’s, Private Equity, and hostile takeovers.  In a research call last week, which Jim Cramer also pointed to, Deutsche Bank said it expects a "major catalyst" and has noted it as a leveraged buyout candidate along with other analysts.  We have seen United Surgical Partners (USPI) agree to be acquired and Genesis Healthcare (GHCI) get an offer to be acquired.  HCA went private last year in one of the largest deals ever, again, and the street expects part of it to come public again.  The private equity boom has taken a bit of a breather compared to the torrent pace seen last year, but certain deals just make sense.

Triad Hospital (TRI-NYSE) makes financial sense as long as you don’t use the mother nature scare tactics on the business model.  The valuations are compelling and the absolute need for them to be public just doesn’t seem there.  If they were going to embark on a massive land grab no matter what the cost, that would not be the case; but this doesn’t seem in the cards.  There is plenty of room to leverage the balance sheet, particularly if Wall Street can resell the "goodwill, intangibles, and other" assets all over again.  I seem to be more strict on this than almost anyone I have encountered, but that is from evaluating things from the break-up and vulture days; so I am entrusting that Wall Street can resell the fluff on the balance sheet just like it always does.

The one issue that has to be dealt with is the charge-offs and write-downs of uncollected bills.  All facilities have to give some uninsured or underinsured discounts, but the key is for their doubtful accounts to not grow much more. If an organization can make these better then they could have a homerun on their hands.  The company has also not had to absorb any major weather event from a hurricane and subsequent flooding this last year in hurricane season, so the comparison to prior years may be more difficult.

TRI has $1.6 Billion in long-term debt and a market cap on last look of roughly $3.75 Billion.  It trades at 17-times 2006 estimates and if you take earnings lower than consensus for 2007 by another 3% that has already been lowered it generates a forward P/E of 16.35. They have just under $1.7 Billion in long-term debt.  If you give them the benefit of the doubt on current assets and look at the long-term investments and their properties and facilities owned, you’ll see the balance sheet is in good shape (and still in good shape if you are strict).  The only substantial argument is that goodwill is high at $1.3 Billion or more, and when you lump in "intangibles and other" there is more than $1.5 Billion of the $6.1+ Billion in total assets.  Still this is doable.  Now that the stock has gotten back within 10% of its 52-week highs it only feels cautionary; less than 2 years ago this was a $55 stock.

I stripped out everything I could on both sides of the balance sheet and income statements, thought about actual values on the balance sheet, and looked over the balance sheets of other comparable hospitals, care facilities, and treatment centers.  Before going further, what the bottom results were that this deal is doable even at $46.00 on the lower-end and at as high as $54.00 on a higher-end.  By "doable" it doesn’t mean that is a minimum offer price that could be implied nor that the maximum is the most anyone will pay, but the argument can still be easily made in that range.  If it was my hypothetical billions at stake I would start the offering negotiations at $45.00 and work up from there with a $50.00 cut-off.  There is a weather risk inherent to Triad because of coastal flat-land proximities, but I have also been more concerned about this than most buyers.

It’s a doable transaction, now we just have to see if the LBO speculation is real.  Its low price-to-book value is skewed because of the balance sheet structure and it could use some improvements on its margins and return on real equity, but to the right firm Triad could be a good fit to the portfolio.  There are also many other add-ons that can be rolled into the operations, and Triad would be an entirely new and fresh company.

It can also still absorb another $400 million to $500 million in structured long-term debt before getting top-heavy, and that could add close to 7% in a future dividend after acquisitions and remaining cash in the company for debt servicing.  This thought process and methodology requires part turn-around and part ‘established’ private equity to do the deal, but it’s very doable.  So this is an estimated pricing range of a deal, now we just have to see if the market talk is real.

Unfortunately this is far less detailed than most buyout pieces, but inquiries have been coming in on this particular case and many have been pondering that an offer may come sooner rather than later.

Jon C. Ogg
January 23, 2007

Jon Ogg is a partner in 24/7 Wall St., LLC and can be reached at jonogg@247wallst.com by email; if you wish to subscribe to our free email newsletter regarding BAIT SHOP buyout candidates, IPO’s and other special situation investments please send an email and title it SUBSCRIBE.  We value privacy and do not share our email lists with any outside parties.

DISCLAIMER: Information has been taken from sources deemed reliable,but no assurances can be made to the accuracy of any figures, claims,or opinions. This is for informational purposes only and is not to beinterpreted as investment advice or a recommendation to buy or sellsecurities. It is the sole responsibility of each individual to dotheir own research and form their own opinions. Neither 24/7 Wall St.,LLC nor its officers assume any responsibility or liability forinvestor gains or losses, and neither holds any material knowledge thatany merger in any form will occur. The writer of this does not hold anysecurities in the companies mentioned, and has not been compensated byoutside parties to portray this situation in any particular manner.  The writer of this article and research piece does not hold securities in any of the companies mentioned in this report.

Reuters reported today that financial giants to the likes of Credit Suisse (NYSE: CS), Bank of America Corporation (NYSE: BAC) via Merrill Lynch, Barclays PLC (NYSE: BCS), and even Royal Bank of Canada (NYSE: RY) are said to be lining up the financing. J.P. Morgan Chase & Co. (NYSE: JPM) is also said to be advising Dell on the deal.

Our question is at what price a deal can really get done here. Michael Dell owns roughly 14% of the company’s outstanding shares. He can likely round up funds from other billionaires in America if wanted to. But again, at what price is a deal doable?

Dell is up another 6% on Tuesday at $13.06, and that is on top of 13% gains to $12.29 on Monday. Dell’s 52-week trading range is $8.69 to $18.36 and its new market cap is $22.8 billion. With this deal leaking, the price of poker has gone up. We do not think that Michael Dell would have to go pay above $20.00 per share just because he would be making all buyers whole, nor would Silver Lake. At $20.00 per share, Dell would be valued at almost 12-times a blended forward earnings estimate. Apple Inc. (NASDAQ: AAPL) would be cheaper at that point and Hewlett-Packard Co. (NYSE: HPQ) is already much cheaper on forward earnings than Dell is.

We are not just looking for a nice round number, but $15.00 per share is what we think a buyer might be willing to offer with the hope that the majority of shareholders will vote in favor of the deal. Whatever the price happens to be, the prospective buyer knows that Dell as the company, Michael Dell himself as the largest shareholder, and the acquirer will all likely be sued in class action suits. That is just the way things go.

Dell last traded above $15 before last summer. This price values Dell at just under 9-times a blended forward earnings. We would note that 7-times earnings comes to just under $12 and 8-times earnings would be about $13.60. Another note of caution before shareholders turn too optimistic about private equity buyout rumors: with shares around $13 now, the stock is already $1 higher than the consensus price target of $11.96 from Thomson Reuters. A boutique research firm named Monnes Crespi Hardt also downgraded Dell shares today to Hold from Buy. We saw that Topeka Capital put a $15 to $18 valuation based upon an ex-cash earnings analysis.

As far as that balance sheet is concerned, here are some of the basics. Dell’s cash is not all domiciled in the U.S. and that would change the numbers up, but here are the basics: Dell has over $15 billion of short-term and long-term liquidity before getting into any receivables, inventory, and other current assets. The company also has some $5.3 billion in long-term debt and it lists another amount of close to $4.2 billion in “other” liabilities and almost $4 billion in deferred long-term liability charges. Any buyer could keep debt on the balance sheet, but leveraging this deal up too much takes away all of the “value” scenario.

Would a private equity buyer try to use the old leverage and dividend model? Not likely. To borrow $10 billion to add on that much more in debt to pay out a big dividend would make the math unattractive for buying Dell. If private equity buyers want to buy the company, chances are high that they also ultimately want to sell the company for a profit down the road. A future IPO without Michael Dell at the helm might even be in order. Would you as an investor buy up a highly leveraged PC maker competing in war of relevance with Hewlett-Packard Co. (NYSE: HPQ) against Apple Inc. (NASDAQ: AAPL), Lenovo, Acer, and others?

One thing that Michael Dell could do is to use the bulk of the available capital to conduct a serious share tender offer to reduce the float substantially. That might drive down the net purchase price and might limit the future price a private equity buyer would have to come up with. That being said, Dell already would cost a few billion more today than it would have on Monday morning. The leaking of discussions only makes the possibility of a deal that much more unlikely from a price perspective alone.

There is another take here besides a $15 per share buyout price. What if Silver Lake and/or others all just become a majority investor in Dell so that along with Michael Dell they can run it as though it is a private company yet still have access to the capital markets like public companies do? If Silver Lake and Michael Dell take the Softbank approach for Sprint Nextel Corporation (NYSE: S) to take majority control of Dell after spending a few billion from the company coffers to repurchase shares and to drive down the float, then shareholders might have a very limited say in a company where they already have very little voice.

Our take is that $15 is the top price a private equity and MBO group will pay based on the valuations of the world today. If Apple Inc. (NASDAQ: AAPL) turns out that its growth is done and that it is just any other tech company now, well that changes things. Silver Lake was founded in 1999 and is a global private investment firm with approximately $14 billion in assets under management.

The one thing we learned back during the silly part of the private equity bubble is that any group of private equity firms can get too ambitious. Groups could overpay to commit untapped capital from excess funds in many of the private equity funds which are still sitting idle. They could pay more than $15 per share for Dell, but we think that is getting very close to the top right now.

So… Why am I still disappointed in the news?  Jamie Dimon focused more on the share buyback than on the dividend and the dividend could have been pressed further.

For a dividend to move from $0.25 per quarter per common share to $0.30 per quarter is usually a good thing.  The dividend yield will now be close to 3.0% rather than 2.5%.  The question is just how much this dividend could have been raised and whether regulators did not want the J.P. Morgan yield to be too much higher than elsewhere in banking.

Thomson Reuters has estimates of $4.70 EPS for 2012 and $5.40 EPS for 2013. The dividend payout ratio is a bit harder to use on an apples-to-apples basis in a bank because there are many notes outstanding and there are preferred issues as well which all have to be paid first.  Still, a $1.20 payout is roughly 25% of expected income.  If you figure it on a GAAP basis it may be more.

A payout of $0.30 per share per quarter is still lower than it has been for years and years even if the nominal yield is close to 3%.  This is still lower than TEN years ago.  So, isn’t it at least some surprise that the financial media was full of nothing but praise for Jamie Dimon yesterday?  Bank of America Corporation (NYSE: BAC) has a tiny sub-1% dividend yield, but the new boosted dividend for Wells Fargo & Co. (NYSE: WFC) will also be 3% and Wells Fargo may have the least amount of retooling to do under the new bank and anti-trading regulations ahead.

As far as how much stock Jamie Dimon and friends will actually repurchase, it is “at least what would equate the dilution from employee stock options.”  The bank authorized up to $15 billion for stock buybacks, with $12 billion approved for 2012.  In reality, this is a large add-on extension of a buyback plan and the market capitalization rate is now $163 billion or so.

Share buybacks indicate the desire of a company to usually hold up the share price.  Higher and higher dividends are usually a signal that the bank knows its earnings power for years rather than just what its stock price happens to be at a point in time.  Dimon has also said that he would not buy back shares at any price, but when it made sense and was more opportunistic than organic growth opportunities.

On Monday we outlined that J.P. Morgan would likely be the first to hike its dividend.  We also noted how a 40% payout ratio would come to $1.88 per year in dividends.  Jamie Dimon has already said that his bank is out of the acquisitions game.  On Monday we also noted, “Expecting an 88% hike seems high, but that implies a 50% dividend hike is very doable and a large buyback will come.”

If this dividend was raised to $1.50 it would have been impressive.  Now the question is whether or not regulators acted to keep that payout from getting too high in yield.  Maybe  Jamie Dimon wanted to raise the dividend higher than he was approved to raise it by.  Maybe not.  Either way, for J.P. Morgan to be the healthiest of the banks this dividend hike was just not impressive enough.

JON C. OGG

J.P. Morgan Chase & Co. (NYSE: JPM) is likely to be the first of the too big to fail banks to raise its shareholder payouts.  JPMorgan might not double its dividend from the current $1.00 now (about 2.4% yield) to $2.00 (about 4.8%) on an annualized basis, but Thomson Reuters has estimates of $4.70 EPS in 2012.  A 40% payout ratio would take the dividend to about $1.88 on an annualized basis.  Expecting an 88% hike seems high, but that implies a 50% dividend hike is very doable and a large buyback will come.

Wells Fargo & Co. (NYSE: WFC) pays out $0.48 on an annualized basis today, and Thomson Reuters has estimates of $3.20 EPS for 2012.  A 40% payout ratio would generate $1.28 on an annualized basis or about 4.1%.  We do not expect that it will raise the payout that much, but it may use much of its excess liquidity to buy back stock selectively.

Bank of New York Mellon Corporation (NYSE: BK) and State Street Corporation (NYSE: STT) are both also expected to come out fine in the stress tests.  These banks could probably double their dividends based upon expected earnings of the trust banks, but we are not as sure that they will formally do that.  Bank of New York pays out $0.52 annualized today and yields 2.3%, and Thomson Reuters has estimates of $2.25 EPS for 2012; a 40% payout ratio would generate a $0.90 per year dividend and that yields close to 4%.

Bank of America Corporation (NYSE: BAC) and Citigroup, Inc. (NYSE: C) are both expected to try to increase their dividends and share buybacks.  Prince Alwaleed bin Talal has recently said he would demand Mr. Vikram hikes the payout soon.  Bank of America does not have a key holder making the same demands and it is still up for grabs as to just how much the bank will really have to allocate for mortgage losses and other settlements.  BofA could be a disappointment on the dividends and buybacks.  If it was just having to raise capital last year, regulators are likely to be less eager to allow Bank of America to start sending money out the backdoor to its shareholders.

Of the bulge bracket investment banks, remember that these are bank holding companies that really have no bank operations.  Goldman Sachs Group, Inc. (NYSE: GS) yields only about 1.2% today and Morgan Stanley (NYSE: MS) yields about 1.1% today.  Each are expected to be able to raise their dividends, but these banks are still more dependent upon the trends of financial market trading and investment banking than they are real loan and balance sheet performance of the traditional banks.

Starting on Monday we should be getting more of a focus on the stress tests.  This week has been dominated by Greece and a slowing story of China and Brazil.  More details and more predictions should start coming front and center on Monday.

JON C. OGG

Some do not like one-time dividends.  A steadily higher dividend and a promise to hike dividends down the road offers shareholders a benefit today and a benefit tomorrow from the higher income.  But the one-time dividend only helps holders at the record and payout dates.  One-time dividends can sometimes be bad for future shareholders who have to value a company with less cash.  We wanted to look at one-time dividends of the past and see if these new one-time dividends are good or bad for shareholders on an ongoing basis.

Garmin Ltd. (NASDAQ: GRMN) announced this morning that it will pay a one-time increase to $1.50 in its annual payment rather than $0.75 to holders of record on April 15.  The company is also moving its domicile of incorporation to Switzerland from the Cayman Islands to Switzerland if and after the shareholder vote on May 20.  Garmin has almost $1.8 billion in cash and long-term investments as of the end of 2009, and with roughly 200 million shares, this will take out about $300 million from the company coffers rather than the usual $150 million.

The vote from Wall Street is that this one-time dividend hike, as the company said was due to its strong results and cash position, is good.  If you bought shares yesterday around $35.30, the yield is 4.2%.  If you buy today at $36.65 the yield is about 4.08%.  So far the reaction is a very favorable one.  Shares are up 3.8% at $36.60 but the stock is up on thin volume.

We’ll get to this a little later, but we did note in the title that Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) may be the indirect winner here in this offering.  A123 raised a fairly recent round led by General Electric Co. (NYSE: GE) and affiliates, which has a 11.7% stake.  At the time the company filed to come public it has raised roughly $160 million and it has large stakes held by venture capital firms (North Bridge, Sequoia and others), Qualcomm Inc. (NASDAQ: QCOM) has a 7.6% stake and Motorola Inc. (NYSE: MOT) has a 6.9% stake.  Gururaj “Desh” Deshpande, the co-Founder and Chairman of Sycamore Networks, Inc. (NASDAQ: SCMR), also has a 9.9% stake.  AllianceBernstein Holding L.P. (NYSE: AB) and Procter & Gamble (NYSE: PG) are also listed under the investors of the company.

It has received a $249 million grant from the U.S. government and the State of Michigan has awarded it a $10 million grant and offered it up to $4 million in low interest loans as an incentive to establish a lithium-ion battery manufacturing plant in Michigan.  The company has also applied for direct loans under the DOE’s $25 billion Advanced Technology Vehicles Manufacturing Loan Program to support this manufacturing expansion, and it believes it will be permitted to borrow up to $235 million under the DOE program.

The terms of the deal are 25.68+ million shares expected in a range of $8.00 to $9.50 per share.  Lead underwriters are listed as Morgan Stanley and Goldman Sachs, with additional underwriters listed as Bank of America Merrill Lynch, Deutsche Bank Securities, Lazard, and Pacific Crest Securities.  25 million shares are being sold by the company and some 680,501 shares are being sold by insiders.  The company noted that it will have 100,426,049 common shares outstanding after the IPO, so its implied market cap at the mid-point of the offering will be approximately $875 million.

A123 Systems is in a sweet spot as it makes rechargeable lithium-ion batteries used in hybrid-electric and electric vehicles.  But the company has also never been profitable and is not cash flow positive.  So it is a high-risk IPO, but it also comes with a huge potential gain ahead because of the notion that electric cars and hybrid vehicles are still going to be the next new thing in autos with a currently very low market penetration.

It has a very impressive lsate of customers and partners which includes making batteries for BMW, Chrysler, GM, Shanghai Automotive Industry Corp., and Delphi.  A123 is also working on battery and power designs for new markets in trucks and buses, and even for parts of the electric power grid.  It sells smaller batteries for Gillette under P&G and sells batteries for cordless tools of Black & Decker.

Warren Buffett is not an investor in A123.  But the reason Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) will indirectly win from this is because of a large stake that was taken in BYD in China.   BYD is a Chinese battery, mobile phone, and electric car company.  Fortune magazine noted Buffett’s right hand man, Charlie Munger, called BYD founder Wang Chuan-Fu something to the tune of a cross between Thomas Edison and Jack Welch.  Berkshire Hathaway bought 10% of BYD for $230 million and Wang turned down an offer to buy a 25% stake in the company.  BYD’s revenues in 2008 almost made the $4 billion mark.

BYD has also begun selling a plug-in electric car with a backup gasoline engine, and sells cellphone batteries and batteries for other consumer electronics such as Apple Inc. (NASDAQ: AAPL) and its iPod and iPhone. And the new goal is to make the batteries recycleable.  BYD trades under the Hong Kong ticker “1211″ and here is fundamental data on the stock.  This A123 IPO from A123 is going to allow for more direct comparisons of battery makers, even if it is somewhat indirect and cross-border.

Back to A123…. During the year ended December 31, 2008, 18%, 76%, and 6% of A123′s product revenue was derived from sales in the transportation, consumer, and electric grid markets, respectively. In the first half of 2009, 70% of A123′s product revenue was derived from sales in the transportation market and 30% was derived from sales in the consumer market.

A123 said in its latest IPO documentation, “We estimate that the net proceeds to us from this offering will be approximately $201.8 million and the net proceeds to the selling stockholders will be $5.5 million, assuming an initial public offering price of $8.75 per share…. “ The selling stockholders consist of our chief executive officer and all of its founders.
A123′s latest amendment to its S-1 is here.

JON C. OGG
September 15, 2009

S&P raised the corporate credit rating on Red Hat to ‘BB’ from’BB-’ to reflect its consistent operating performance and improvedcapital structure.  S&P said that the outlook is stable.  Keep inmind that this is still a "junk bond" rating, but it only has to goabove "BB+" up to "BBB-" to reach investment grade.

Also noted are the relatively narrow business profile and modestoperating scale, as well as rapid technology evolution.  If you readinto the "barriers to entry" of smaller Linux players, it almost soundslike S&P believes that it is getting a lock in the Linux space forcomputers.  Analyst Martha Toll-Reed said, "We believe these concernspartly are offset by barriers to entry provided by the large number ofindependent software and hardware vendors which certify their productsto work with Red Hat, as well as liquidity, balance sheet strength andcash flow that are good for the rating level."

Red Hat shares are down today by 2% at $14.92 and its market cap isjust over $2.8 billion.  We also wanted to see for ourselves what else S&P saw with our glance over the books and over expectations.  It actually looks like much of the data here makes sense.  At least it does on the part where thingsare not falling apart at its business.  We still have some strongconcerns about what all of the $400 and under netbooks and $500 andunder notebook and desktop computers are doing to PC’s and therefore tosoftware vendors.

But as of November 30, Red Hat had $758 million in cash and shortterm instruments as well as $317.8 million in longer-term investments.All of its operating costs seem offset and its long-term liabilitiesare mostly deferred charges.  We do not believe that RedHat is anywhere close to immune to the malaise out there.  But analystsdo still expect it grow for now.  It is expected to post over $650million in its fiscal period ending FEB-2009 and $737.7 million for thefiscal period ending FEB-2010.  That does not mean that it is expectedto show earnings growth, but it is still expected to run atvery profitable levels.

S&P did not really endorse Linux here as an operating system.  Butit did just give it the thumbs up on the business environment and thesafety of its business.  Now our only question is if all of the old rumors about Red Hat being a takeover target have any real merit for down the road.

Jon C. Ogg
January 29, 2009

As of yesterday’s closing prices, Exelon’s offer for NRG amounts toabout $6 billion, a premium of 24%. There’s no place else for NRGshareholders to look for that kind of return. Of course, those whobought NRG at its 52-week high of more than $45/share will still feelssome serious pain.

Whatever the outcome is, this one is still in the unresolved and unfinished business categories.

Paul Ausick
November 13, 2008

The comments by Chambers are refreshing and, hopefully, he can stick to them. He will not manage his company quarter to quarter. The long term prize is too good.

Cisco would still seem to be in one of tech’s few big sweet spots. Chambers told Reuters "We think 12 to 17 percent growth is very doable if our vision, our differentiation strategy and execution is right. That’s pretty strong for a company that’s $40 billion in sales."

In a broadband world, the business of selling routers and video delivery technology should be very good for a number of years to come.

Cisco does face a headwind in a global recession. It is not hard to see large telecommunications and cable companies pushing back capital spending for a few quarters or even a couple of years to keep their financial results in line with Wall St. expectations. Cisco’s set-top box business has a lot of competition now from companies like Amazon (AAPL) and Apple (AAPL) who want a device on top of the TV. Cisco’s big video conferencing business faces less expensive products based on IP delivery. Microsoft (MSFT) has a big business in this part of the industry.

Chambers is making a promise. Long-term thinking brings the best results. If the economy gets bad enough, it may be a hard pledge to keep.

Douglas A. McIntyre

Nice work, if you can find it.

CryoCor’s shares are up on a deal with Boston Scientific (BSX). The two companies "are collaborating on the development of cryoablation, or extreme cold, to treat irregular heartbeat, or, cardiac arrhythmias," according to The Associated Press. Of course, the company’s quote the largest possible numbers to show the potential of the project: "About 6 million patients have the affliction worldwide, and $9 billion is spent annually in the U.S. to treat it, the companies estimated."

Of course, the device has not gone on the market yet, but CryoCor’s shares have gone from $2.50 to $6.65 in two days.

Nice work, if you can find it.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com