Identifying Acquisition Targets

 | Mar 14, 2012 | 10:30 AM EDT
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Tuesday's announcement that Sumitomo's tire supply unit TBC Corp. had agreed to buy auto repair chain Midas (MDS) for $11.50 per share was a long-time coming. Yet I must still admit my surprise when fellow Real Money contributor Tim Melvin informed about the deal upon my return to my office mid-morning. The asset-rich Midas has struggled during the past couple of years. But in the past several months, the stars began to align, signaling that something was going to happen.

The takeover price represents a 27% premium to Friday's close, and although I believe that the company is worth more than the $173 million TBC offered, Midas shares are up more than 120% since early August. That's the second name I have had taken over since November, when General Dynamics (GD) acquired Force Protection.

While the Midas deal was not a huge surprise, another deal announced yesterday was more surprising. Apollo Global Management announced that it is taking Great Wolf Resorts (WOLF) private for $5 per share; Apollo will also assume Great Wolf's debt, putting the value of the deal at just over $700 million. I termed Great Wolf a "longshot" in late 2010, because it had never turned a profit on an annual basis since going public. Due to its heavy debt load, I don't understand why this deal is happening, but if nothing else, it's nice to see some takeover activity.

As a value investor, one of my missions is to own out-of-favor names before others in the market see the potential value. I want to own companies that will be taken over at good premiums to what I paid. So it's natural to speculate on which other names in the portfolio might ultimately be acquisition targets.

Long-struggling Callaway Golf (ELY) is a possibility. Despite its stumbles in recent years, it is still a well-known brand-name with a good balance sheet. With a current enterprise value of just $420 million, growing frustration, and lots of institutional ownership, I could see some activist activity developing that would force either change, or the sale of the company. This idea, however, is admittedly not a new one, and I've been wrong so far in the years that I have held that opinion.

Krispy Kreme Doughnuts (KKD) is another on my list of potential targets. Since nearly falling into obscurity in the mid 2000s, this company has made dramatic progress. It's another solid, well-known brand name, and one that is actually growing again. It holds little debt, and with a current enterprise value of about $560 million, I'd be surprised if there wasn't interest in this name by a bigger fish looking to deploy some cash and build out its brand portfolio.

Finally, there is small restaurant chain Cosi (COSI), the poor-man's Panera Bread (PNRA) -- not because its menu prices are cheap, but rather because the company has never turned an operating profit. I have written about this one quite a bit lately because the story keeps getting more interesting. In an interview on his "Mad Money" show with Panera CEO Ron Shaich last week, our own Jim Cramer asked whether Panera might be interested in Cosi. While Shaich did not really answer him, the speculation has now been raised.

Whether a deal is in the cards remains to be seen, but it could be interesting for both companies. With 80 company-owned and 57 franchises, primarily in the Northeast and Mid-Atlantic, Cosi's current enterprise value is next to nothing at $52 million, and a deal might give Panera easy access to some areas it's not currently in. Panera, if interested, might offer the best solution for a company that has struggled on its own, and has one last chance, in my opinion, to right the ship. Never a dull moment.

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