Wanted to open up a discussion on what everyone's current thoughts are on public companies that are currently good LBO candidates. Got into a debate with a friend who thinks Peloton is a good candidate despite glaring CF issues, made me wonder what other companies people are thinking about here.
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There have been quite a few privatizations this year and not really any match the characteristics of Peloton. Given the large amount of interest payments required when privatizing, a majority of companies being privatized are 1.) mature 2.) consistent 3.) cash flow positive 4.) EBITDA positive. I probably missed some metrics there but you get the idea. You privatize single run companies, not the ultra risky home-runs
Citrix Systems
Good software / cloud business Monster FCF generator /rising FCF per share High FCF yield Paying down debt to delever balance sheet. creating shareholder value High ROCE Reasonable growth
As predicted stock up 50% . Eat shit Blackstone / apollo losers taking rite downs
Doing well but the issue is its TEV is way too large and mega buy-outs have been a scarce watering ground. You'd have to expect co-invest from multiple groups. Large enough funds like BX or KKR probably won't be able to take it private even using 70% leverage, and strategic platform LBO sponsors seeking roll-up like Thoma Bravo have looked at it in the past (2017) and passed.
Nordstrom. Very cheap. Market not giving it credit for its off-price business and strong e-commerce platform. High quality real-estate assets. Strongest brand among consumer retail businesses (you can check surveys online). Controlling family had indicated strong desire to take the company private a couple of years (wasn't able to convice the PE firms); things are very different right now with stock getting battered by public markets; this has reduced the owners negotiating leverge. everyone knows this is transient and economy / spending will be back on track soon enough. I don't know but I expect management to be seriously considering a MBO right now, and this IMO will reflect atleast a 100% premium over the current stock level. But who knows.
Nordstrom has the strongest brand? Seems subjective to me. Also, Nordstrom itself is more of a retailer than an actual fashion company, so I would probably discount the value of its moat vs single brand fashion cos eg LV / Gucci, a glance at margins will be enough to verify this
Also, what about the massive capital intensity of investing in the e-commerce platform each year?
Company already was levered about 3x to adjusted EBITDAR at YE 19, so a buyout would add to a business that has increased cash outflows by $200mm a year in the last 3 years
The old time strategy of levering retail companies, milking whatever is left of the brand and starving any investment spending looks like a foolish idea given what has happened in the last 5 years with e-commerce
TLDR: Not quite sure that this checks the boxes of a good LBO candidate
PetMed Express
Why?
1) Untapped (but high competition) industry where only 14% is captured by online retailers. The majority of the market share remains in the hands of vets. PetMed has 6% market share.
2) 0 debt for the last several + years
3) Decent revenue growth (expanding on 4th points) with gross margins of 28-30%, the highest in the industry due to product light business model.
4) Management is a crutch of digital innovation. Would like to see current CEO Mederes be on the BoD but replaced by someone else. My reasons are that their website is completely outdated and they've been saying over a year that they're working on it. Their marketing is poor compared to the competition. Mederes also ruined a lot of relationships with the vets in the early 2000s of which a lot of them are not reconciled today. A new CEO could mend those relationships and innovate their platform and marketing strategy which would benefit the top line which trickles down nicely to FCF.
5) Would not buy-out near current price since COVID-19 is completely priced in. My model (as a prospect) valued the company at a $31/share intrinsic value. Which is a reflection of deteriorating margins due to competition driven by increase in operating expenses (marketing).
It would be interesing to see some due diligence on this as the Vet Industry is expected to grow for the next ~20 years.
I think there is too much competition with Chewy and Amazon/Walmart entering the market of ecommerce sales. Dont believe I saw much on future guidiance from PetMed. Whoever buys them would need to have a strong 5 year investment thesis.
Potential Buyers:
I created a ~20 page report on them for a long-buy which I don't mind sharing but I worked on this several months ago and I didn't finalize my report either so the grammar and stuff is faulted. I initiated a Buy but in hindsight I would not buy this company for my personal portfolio. At the time, I was over confident in management's ability to run over the competition and maintain their margins. Menderes is a fantastic CEO, but only if it was still the early 2000s.
GroupOn (GRPN) would be a great turnaround story. Wanted to pitch this formally forever. Recent price jump that sort of took some of the opportunity off of the table, but still has potential even at a $685M market cap (8/17/2020).
i find peloton mind boggling as an lbo target at its current valuation. i realize this is a post bitcoin/tesla/gamestop world where nothing make sense, but i doubt it generates anywhere near the cash flows needed for that astronomical purchase price.
its hard to find good public targets given where everything is trading. maybe spirit aero would’ve been good prior to its big run this past fall
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