Is Prudence Passé? Private Equity and LBO Cyclical Sector Targets

by: Michael Panzner

In the old days, bankers and managers would have thought long and hard before loading economically sensitive companies with large amounts of debt, especially following an unusually long period without a major downturn in the business cycle. However, in the age of big swinging private equiteers and leveraged buyouts-a-go-go, such prudence is seen as passé. Among the cyclical sectors being targeted nowadays:

Semiconductors (via AFX)

Infineon Technologies AG was approached at least three times in the past six months by different private equity funds who were interested in acquiring the company, according to an article to be published in tomorrow's Financial Times Deutschland, citing sources close to the chip maker.

'In the past six months, there were at least three enquiries from private equity firms, who wanted to discuss the takeover issue with management,' the newspaper quoted a source as saying.

Airlines (via Reuters)

A consortium led by Macquarie Bank Ltd. came closer to clinching an $8.7 billion takeover of Australia's Qantas Airways Ltd. on Monday after the airline released an independent report saying the offer was fair.

The report said the offer price of A$5.60 a share was within its valuation range of A$5.18 to A$5.98.

Qantas said its board had unanimously recommended shareholders accept the bid. Its recommendation had been conditional on the independent report finding the bid price to be fair and reasonable.

"Qantas has delivered year-on-year profit, growth and diversification. But while the business has prospered, the Qantas share price has not," Chairman Margaret Jackson said in a letter to shareholders.

Retailers (via the Chicago Sun-Times)

The $39 billion buyout of Equity Office Properties Trust (EOP) that was completed last week showed the power of private funds, which are sitting on heaps of cash and can raise a lot more of it cheaply. Real estate will continue to be the focus of these funds, but expect that they'll try other sectors, too. One likelihood is more private takeouts of publicly traded retailers.

This is really a continuation of a theme expressed here before, that department stores are coming back and perhaps changing the pecking order in the merchandising world. That was confirmed by the January sales reports issued Thursday, which showed some of the healthiest same-store comparisons coming from the likes of Federated Department Stores (FD), Nordstrom (NYSE:JWN) and Saks (NYSE:SKS). Nobody is saying the big discounters are dead, but their growth is slowing down.

Many who follow retail believe the mid-market stores and the high-end shops are the sweet spots for investment. Neiman Marcus already has gone private and there are other opportunities among retailers in specific niches.

Analysts at Citigroup Investment Research considered the impact of private equity on retailers and last week issued a lengthy report in which they highlighted what they considered as attractive takeover targets. They analyzed the stocks based on debt levels, stability of cash flows and categories that are more like educated guesses, such as "opportunity for operational improvement and margin expansion."

The names they came up with: Liz Claiborne (LIZ), Timberland (NYSE:TBL), Finish Line (NASDAQ:FINL), Build-a-Bear Workshop (NYSE:BBW), Circuit City (NYSE:CC), Advance Auto Parts (NYSE:AAP), Radio Shack (NYSE:RSH), Dollar General (NYSE:DG), SKS and BJ's Wholesale Club (NYSE:BJ).

To which I can only add: How about a big deal that makes people stand up and take notice? When private equity is sniffing around retail, can Edward Lampert of Sears Holdings (NASDAQ:SHLD) be far away? What about Lampert making a run at another grand old name of the mall, J.C. Penney (NYSE:JCP)?

Hotels (via the Associated Press)

Luxury hotel operator Four Seasons Hotels Inc. (FS) said Monday it agreed to accept a $3.37 billion going-private offer from its chief executive and firms owned by Bill Gates and a Saudi prince.

Under the terms of the agreement, parties including Gates' Cascade Investment LLC, Kingdom Hotels International and Isadore Sharp, Four Seasons' chairman and chief executive, will buy the Toronto company for $82 per share. Kingdom Hotels is owned by a trust created by Saudi Prince Alwaleed Bin Talal, a nephew of the late King Fahd and one of the richest businessmen in the Middle East.

When the transaction is completed, Sharp will receive a one-time payment of $289 million related to a long-term incentive agreement approved by the company's shareholders in 1989.

The price represents a premium of 28 percent over the company's closing price on Nov. 3, the last trading day on the New York Stock Exchange before the announcement of the bid. Including assumed debt, the company valued the deal at $3.8 billion.

Four Seasons' shares fell $2.52, or 3 percent, to close at $81.36.

The company's board of directors has already approved the transaction, which is expected to close in the second quarter, subject to shareholder approval, among other conditions. Shareholders will vote on the deal in April.

"I am delighted that the board, after considering the recommendations developed by the Special Committee and its advisers, has determined to support what I believe is the best way to preserve and expand the long-term strategy, vision and core values of Four Seasons," Sharp said in a statement Monday.

Auto Parts (via Bloomberg)

The Lear Corporation (NYSE:LEA), which makes automotive seats, agreed Friday to be bought out for $2.8 billion by its largest investor, the billionaire Carl C. Icahn, although it will solicit competing bids.

The deal is worth $5.3 billion, including $2.5 billion in debt that Mr. Icahn's American Real Estate Partners will assume. Mr. Icahn already owns nearly 16 percent of Lear's 76.3 million outstanding shares, which would be valued at $36 each.

Lear, based in Southfield, Mich., expects the deal to close by the end of second quarter. But the company said it would also consider other offers submitted within 45 days and if it accepted another proposal, it would pay Mr. Icahn's firm an undisclosed breakup fee.

Another potential roadblock in Mr. Icahn's way is how other major shareholders see the deal. At least one has expressed concerns about the takeover.

But, in a statement, the chairman and chief executive of Lear, Robert E. Rossiter, said: "Following a very thorough review of the proposed transaction, our board unanimously concluded that the A.R.E.P. offer was in the best interests of Lear's shareholders. We believe that the transaction price, which represents a multiple of about nine times our forecasted 2007 core operating earnings — excluding the interior business — provides shareholders with significant value."

He would say that, wouldn't he?