Weak stock prices and loads of idle cash spell one result:Buyout
activity. In July, a number of rumored deals have either progressed
-- or even been consummated -- and there's plenty more to come.
Here's a quick recap of some possible deals, and how they've played
GeoEye finds a match
In June, I
that satellite-imaging firm
had found itself in a hole after losing a key government contract
Withshares at $14.50, I noted that GeoEye's biggest backer,
Cerberus Capital's Stephen Feinberg, would love to find a buyer for
his losing investment, noting that rival
could afford to make a $20-a-shareoffer . Well, that's just what
happened andshares are up a heady 35% in just one month.
Digital generation confirms the rumor
On Friday, July 13, I
in on rumors that
Digital Generation (Nasdaq:
was up for sale.
Shares initially cooled a bit, but made a quick move toward the
$12-mark on July 17, when management confirmed the rumors. Of
course, a toughmarket backdrop has again cooled off these
, but don't be surprised if a $20buyout offer emerges later this
Christopher & Banks wants more
On Wednesday, July 11, I also
that private firm Aria Partners offered to pay $1.75 a share to
Christopher & Banks (NYSE:
Thatoffer was rebuffed, as the retailer subsequently lined up a
new credit line that brings more financial flexibility. At this
point, the retailer is under less pressure to sell and has more
time to fix operations. It's up to Aria Partners to decide whether
it's sensible to make a higher bid. Might $2.50 a share get it
done? Management might want closer to $3.50 a share, which
represents tangiblebook value .
Christopher & Banks has posted weak results during the past
few years, due in part to the sloweconomy and in part to poor
merchandising decisions. Yet management knows that a better
merchandise mix, along with a perkiereconomy , would restore some
of this retailer's lost luster -- and its fallenmarket value .
Who else is in play?
Merger andacquisition (M&A) activity tends to run around broad
themes. One of them involves the pursuit of oil and gas assets in
North America by foreign buyers. Major Chinese energy firms have
sought to make major deals in the United States, but have been
rebuffed for national security reasons. So they're turning to
On Monday, July 23, China's Cnooc said it would pay a hefty $15
billion for Canada's
. Shares opened up a cool 50% on Monday morning. Analysts at
Goldman Sachs had an inkling that a deal may be coming. In a July 8
note to clients, they suggested that Nexen and
Cenovus Energy (NYSE:
might get a
Will Cenovus be next? The Alberta-based energy firm also has
many of the shale assets that Chinese buyers covet. "[Cenovus is]
the lowest cost oil sands producer with the ability to grow oil
production 14% per year to 2021," notes Merrill Lynch as Canada
builds an energy pipeline to the Pacific Coast, much of the output
of these oil sands could make their way to China.
Morningstar's analysts say MEG Energy could be the next buyout
target. (Shares trade in Canada under the ticker MEG if you have
access to Canadian equities). They note that MEG, "has
complementary oil sands assets, investments in pipeline and storage
terminals, and a major shareholder (private-equity firm Warburg
Pincus, with a 23% interest), which we suspect will eventually need
to liquidate its stake in the firm."
Auto parts retailers in play
Also early this week, rumors circulated that auto parts retailer
Carquest (which is owned by privately-held
Genuine Parts Company (
will soon be put up for sale for a purported $2 billion. Any
private equity (PE) firms that want to buy into the space can get a
lower price by acquiring rival
Pep Boys (NYSE:
. PE firm The Gores Group planned to buy Pep Boys for nearly
$800 million earlier this year. But Gores eventually changed its
mind, creating one of the more unusual stock charts you'll find.
In the wake of the botched deal, Pep Boys'market value is now just
$500 million -- one-fourth of what Carquest is reportedly expected
to fetch. If a deal for Carquest is consummated, then expect
investors to pivot back to Pep Boys, as this industry could move
toward a phase ofconsolidation .
Risks to Consider:
In an uncertaineconomy , companies tend to move a bit more
slowly, so M&A action may not truly heat up until the near-term
economic andmarket headwinds abate.
Action to Take -->
Earnings season is often a time when companies agree on a deal.
Both parties have had a chance to size each other up, and typically
await and see what the quarter will look like beforegoing public
with their talks. Once a deal is announced, you may want to quickly
look at similar companies that may get snapped up, as M&A
activity often extends across a sector once it gets underway.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.