When Are LBOs Coming Back?

Includes: BIG, DELL, KSS
by: George Kesarios

With yields at all time lows, many LBO firms are not losing the opportunity to refinance older debt from deals of yesteryear. In fact in Europe, LBO firms are taking full advantage of lenders' kindness and refinancing debt at record levels.

According to Bloomberg, Europe's borrowers have issued $17 billion of speculative-grade bonds this month. That's 38% more than the previous high of $12.3 billion in January 2011. Investors are snapping up European Junk debt in droves, as the region's debt crisis subsides and central banks globally keep rates at record low levels.

So with rates so low, the question is, will LBO activity come back after many years in hibernation?

Well, like you all know, an LBO group led by Michael Dell himself is preparing to take over DELL (DELL) for at least $15 a share according to a report. Dell is currently trading below that level and that leaves room for speculation on the part of investors for a quick return.

However, if one looks around there are other possible deals in the making.

Again according to Bloomberg, Kohl's (NYSE:KSS) trades at only 0.58 times sales and at a cheaper multiple to profit than any other North American department-store chain. Edward Jones & Co said Kohl's could be an attractive buyout candidate for a private equity firm. Jeff Burchell at Aston Hill Financial seconds that and says:

You're not paying a lot for the stock, so it does fit the bill for someone coming. For a buyer who believes Kohl's hasn't become irrelevant, then with a new management team or an invigorated management team with a new private equity sponsor, you could get some excitement back.

Kohl's runs more than 1,100 stores across the U.S. with $19 billion in sales. Keep your eye on this one for possible LBO action, because if an LBO firm pops up somewhere, there will be a premium to be paid compared to where the stock is trading today.

Shares of Big Lots (NYSE:BIG) have been climbing lately, again on speculation that an LBO deal might be in the works. According to an analysts at MKM, the company could command an LBO price anywhere from $35 - $42 per share. The current price is about $32, which also leaves room for speculation to earn a quick return.

My take: With today's record low rates, I am surprised that we have not already seen a plethora of LBO deals. I am also surprised - not to say shocked - that the market has not closed the gap between the reported possible price tag for Dell and the current price of the stock. I mean Dell is the biggest LBO deal in a while and no one seems to care.

As for the other two stocks that I mentioned above, again the market seems to take these rumors with a yawn. That was not the case years ago, which leads me to believe that something is changing in this market. Either the market does not believe these deals are possible, or something else more groundbreaking is going on.

In either case, keep an eye out for LBO activity, because at today's low rates and with investor appetite for higher yield, there will be no shortage of cash available for deals, especially at today's rock bottom valuations. This also is a positive for the market as a whole, and if we see just 2-3 LBO deals going forward, that will put some spark into this market.

Possible buyout candidates are boring companies with good cash flow and a low valuation. And in today's market, there are plenty to be found.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.