Who Wants to Make a Deal?

 | Jun 15, 2012 | 2:30 PM EDT
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Yesterday's report that chemical name Huntsman (HUN) was being shopped around to private equity firms by Bank of America sent its shares up 10%. This is certainly not the first time there has been speculation (post the Hexion merger debacle) that this name, which is cheap (trading at less than 6x 2013 consensus earnings estimates), would be taken out. How ironic would it be if Bain Capital, said to be one of the firms Bank of America contacted, ended up doing a deal? Huntsman was founded by Jon Huntsman, Sr., who is the father of the former Republican candidate and current Huntsman board member John Huntsman, Jr. Bain, of course, is Mitt Romney's former firm.

While it's too early to say that a deal will be done for Huntsman, the current environment appears target rich for mergers and private equity deals. In my view, one of the places to look for potential deals is in smallville: names that are unloved or underfollowed that are not able to prosper own their own, but have assets on the books and would appeal to a bigger fish or private equity.

We've already seen it in the past year with Midas (MDS) and Force Protection (FRPT), two names that I owned. While I made money on each position, I was disappointed with the numbers for both. Midas was real estate rich, but could not seem to put up solid operating numbers, while Force had a great balance sheet, but was simply too small to continue thriving on its own.

While the deal for Pep Boys (PBY), a name I've owned in the past, fell through, this is still the perfect example of a company that should ultimately be taken out. Real estate rich, with questionable operating performance, the shares are now trading 37% below the $15 per share that Gores Group had originally offered. This one is on my watch list, and I'd gladly pick up some shares in the $7 to $8 range, if they get there.

I thought briefly that Cosi (COSI) might be a target for Panera (PNRA), not because of assets (Cosi doesn't really have any, but there are $209 million in net operating losses), but rather because of the locations of Cosi stores, all leased, and Panera's desire to expand. That speculation has been put to bed, at least for now, due to Cosi's recent rights offering.

But there are certainly other small names that could be targets of private equity, or acquisitions. In the restaurant space, Ruby Tuesday (RT) is asset rich, but struggling somewhat operationally. Wendy's (WEN) continues to be a disappointment as a public company, and I wonder if it would be better off in private hands. In technology, names such as Ingram Micro (IM) and Electro Scientific Industries (ESIO) are cash rich, but the stocks have not been performing well. Callaway Golf (ELY) is a solid brand name that continues to struggle, and there has been some recent activity in the industry with TaylorMade taking out Adams Golf (formerly ADGF). I also continue to think that Krispy Kreme (KKD), another solid brand name with assets, and a sub-$400 million enterprise value, could be a nice target for a bigger name looking to build its brand portfolio.

The possibilities are endless.



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