By and  on December 14, 2006

Speculation is again building among investors that Gap Inc. may be the target of an acquisition, and hedge fund billionaire Edward Lampert's name just won't go away.

Several financial sources speculated that Lampert could be looking to complete Act III. Act I was scooping up Kmart from bankruptcy. Act II was merging the troubled discount retailer with Sears, Roebuck & Co., creating Sears Holdings, in 2005. Now, some financial sources theorize that Lampert wants another acquisition. They claim Gap, Home Depot and Anheuser-Busch are among the names being considered as potential targets. Financial sources contend Gap is the most likely candidate, but other analysts dismissed that idea, pointing out that acquiring the retailer would be difficult because Gap, based in San Francisco, is tightly controlled by the Fisher family.

Lampert could not be reached for comment on Wednesday. A spokesman for Gap declined to comment.

Still, the prospects are intriguing, given Gap's stock valuation; low, long-term debt, and strong operating cash flow, which is about $1.8 billion for the trailing 12 months.

Gap Inc.'s market capitalization is about $15.9 billion. The stock has been trading around $19. The 52-week high is $21.39, and the low is $15.91. Gap has an EBITDA enterprise multiple of 7.1, which is well below industry average takeout multiples of 8.9 times pre-tax earnings. At the 7.1 multiple, the price tag on Gap Inc. is roughly $13 billion.

From Lampert's perspective, the retailer's huge cash flow could be diverted from paying dividends, making investments and doling out capital expenditures ($600 million in the most recent fiscal year) to his favorite investment: derivatives.

Lampert, who is founder of ESL Investments, was able to triple earnings at Sears Holdings, to $196 million, in the third quarter on a 2.1 percent sales decline by making investments in derivatives. Derivatives involve contracts between companies that typically are hedged or speculative. These financial instruments often involve equity, bonds or commodities.

Citigroup Global Markets analyst Kimberly Greenberger said in a report last August that Gap "does not score high as a likely privatization candidate."

Later, in a separate interview, Greenberger said, "Any potential acquirers would have to get signed off by the Fishers, who own 30 percent of the common stock. I don't think the Fishers are interested in selling Gap. They are the founding family and have historical ties that I don't think they are willing to cut."

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