Private equity players are sitting on money that they need to put to use, but their next leveraged buyout target remains far less clear-cut.
Participants in a recent panel on “Retailing and the LBO Market in 2011” hosted by the Retail Marketing Society included Margaret Cannella, adjunct professor at Columbia Business School and former managing director and global head of credit research and U.S. corporate strategy at J.P. Morgan; Carla Casella, managing director at J.P. Morgan, and Virginia Chambless, executive director at J.P. Morgan.
In a brief introduction to the world of private equity, Cannella noted that attractive LBO targets include companies that are underperforming, underleveraged or undervalued or have high cash balances or assets that can be monetized.
“Private equity is sitting with an unprecedented amount of cash. They have to invest it or else they have to give it back” to investors, Cannella said.
While she expects LBO activity in 2011, she doesn’t foresee the big LBOs of the recent past because the credit markets are just “okay.” She also noted that right now “buyers are a little bit more cautious.”
Chambless told the audience that, surveying firms in her coverage universe, she’d expect a multiple in the range of seven times leverage. “Talk of Macy’s comes up all the time,” she said, “but it’s a large company and at seven times leverage, that would mean $11 billion in debt.” While that kind of debt load is doable in better economic times, Chambless said a Macy’s LBO was unlikely due to the “sheer debt load” given current market conditions.
Other retailers that come up as possible LBO candidates via J.P. Morgan’s screening process are Dillard’s Inc., The Bon-Ton Stores Inc. and Ross Stores Inc., she said.
Casella noted that Dillard’s will probably not go the LBO route as the family members are known for wanting to keep control, although its recent decision to spin assets into a real estate investment trust suggests the firm “wants access to more capital that is [then] monetized by the real estate.”
Casella predicted that the next LBO candidate is likely a specialty chain, such as an Aéropostale Inc. or Abercrombie & Fitch Co., that doesn’t currently show up on their screen models due to lack of debt.
As for the $3 billion acquisition of J. Crew Group Inc. by TPG and Leonard Green Partners, Casella said the chain is small enough that it can still expand its store base, and isn’t so big that it can’t be LBO’d.
“The team [at J. Crew] knows how to operate in a leveraged environment, and that helps,” Casella said.