Goldman Sachs Identifies Take-Private Targets

Goldman Sachs recently sent institutional clients a research report pointing to public-to-private targets with the best return prospects.

The top dogs were Performance Food Group Co. (Nasdaq: PFGC) at a 75.7 percent projected IRR, SuperValu Inc. (NYSE: SVU) at 74.7 percent, CB Richard Ellis (NYSE: CBG) at 71.3 percent, Sunoco Inc. (NYSE: SUN) and Alexander & Baldwin Inc. (Nasdaq: ALEX) at 70.4 percent, Circuit City Stores Inc. (NYSE: CC) at 69 percent, Unisys Corp. (NYSE: UIS) at 65.6 percent and Rite Aid Corp. (NYSE: RAD) at 65.6 percent.

Picking the next auction item has become a Wall Street parlor game, but Goldman Sachs actually uses some math for its predictions.

To begin, it made a variety of assumptions based on industry standards. They include a 20 percent purchase price premium, and the use of a leverage package that includes 60 percent bank debt (LIBOR +250bp), 30 percent senior notes (LIBOR +375bp) and 10 percent subordinated debt (LIBOR +500 bp). It also plugged in relevant fees, and assumed a five-year investment horizon. It did not include any dividends paid to private equity sponsors, or use any specific firms as models.

It then plugged 937 non-financial companies into its LBO calculator, and determined that the median five-year IRR for these take-privates would be 10.6 percent. Given that the typical IRR hurdle rate is around 20 percent, most of the companies Goldman Sachs analyzed were not considered buyout-worthy. On the other hand, it did come up with 16 companies that not only got past the hurdle rate, but also surpassed the 50 percent IRR mark, including the eight listed above.

Goldman Sachs also provides a list of stocks whose projected IRRs currently are below 20%, but which it believes could be lifted above the hurdle via operational restructuring. These include Diamond Offshore Drilling (NYSE: DO), Burger King (NYSE: BKC), Atwood Oceanics (NYSE: ATW) and The Ryland Group (NYSE: RYL). Finally, it suggested that companies like The Finish Line Inc. (Nasdaq: FINL), Valero Energy Inc. (NYSE: VLO), P.F. Chang’s (Nasdaq: PFCB) and OfficeMax (NYSE: OMX) are primed for leveraged recaps.—D.P.