• Central Garden & Pet (CENT) Cut to Underperform at Jefferies.
• Helen of Troy (HELE) Cut to Hold at Jefferies.
• Intel (INTC) Cut to Neutral at Goldman Sachs.
• Libbey (LBY) Cut to Underperform at Jefferies.
• MetLife (MET) Cut to Neutral at Goldman Sachs.
• Monster Worldwide (MNST) Cut to Hold at Citigroup.
• Pozen (POZN) Cut to Hold at Citigroup, Cut to Underperform at Jefferies.
• Prudential Financial (PRU) Cut to Sell at Goldman Sachs.

Jon C. Ogg
October 20, 2008

Apria Healthcare (AHG) Slipping with industry. Drops to $16.08 from 52-week high of $31.57.

Amerigon (ARGN) Concern about last week’s modest earnings. Sells off to $10.92 from 52-week high of $22.35.

Secure Computing (SCUR) Lose widened on lawsuit. Still selling off. Falls to $5.22 from 52-week high of $10.54.

Douglas A. McIntyre

Most of the well-known private equity firms are in the process of raising new capital at levels of more than $10 billion each. According to the FT "The funds are being raised even though the chaos in the debt markets has derailed the traditional private equity strategy of buying companies with a modest slice of equity and loads of debt."

What can Blackstone (NYSE:BX), Apollo, Bain, and their peers be telling institutional pools of money about how they can use their new investments? Valuations may have come down, but the risk of buying almost any company has gone up. An economic slowdown may not spare most sectors.

One investment path that private equity might take is refinancing high debt at fairly healthy companies with bonds which have a lower coupon. Barron’s published a list of firms which might be candidates for a turnaround, if they could get better interest rates on their borrowing. Libbey (NYSE: LBY), FelCor (NYSE:FCH), and Gray Television (NYSE: GTN) made that list. If the private equity operators can get warrants for stock at current prices as part of these transactions, the benefit of lower interest rates should help move shares up and put those warrants well into the money.

Another route for private equity is putting capital into companies which have gotten one round of financing recently and may need another because of deteriorating markets. Merrill Lynch (NYSE: MER), Citigroup, (NYSE: C), and several other large financial institutions have taken capita from sovereign funds. This first tranche should cover most of their needs, but if additional losses force them to raise more capital, terms may get very attractive. The most at-risk money has probably already gone in and auditors have probably picked through and forced disclosure of the most vexing problems at big banks and brokerages.

The old stand-by of straight buy-outs is still around, especially as a falling stock market has brought some shares way down. There is a point where even companies like Sprint (NYSE: S) and Motorola (NYSE: MOT) will have values so low that the amount of risk in taking them private or buying them and breaking them up will actually make reasonable financial sense.

All of this means that private equity firms will move into a position of being "bottom feeders". It does not carry the cache of purchasing companies at at 20% premium during the peak of the market. But, it will have to do.

Douglas A. McIntyre