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Tuesday, August 08, 2006

Private Equity Still Going Gangbusters

Stock Tickers: RMK, REY, ARS

This morning's announcement that Aramark (RMK) planned to go private was not really new. The price was a tad higher, but the company has been in play for months now. The $33.80 cash buyout tops the $32 bid in May from the same buyout group including CEO Joseph Neubauer and firms Goldman Sachs, CCMP Capital, JPMorgan, Thomas H. Lee, and Warburg Pincus. The transaction is expected to close late 2006 or early 2007. This deal was valued at $8.3 Billion after the assumption of $2 Billion in debt. The shares were down slightly in reaction, as the street was hoping the deal would be sweetened to around $35.00 per share.

Reynolds & Reynolds (REY) was a bit of an unexpected deal. The company will be acquired for $40.00 per share in cash. This is not a true private equity deal as the acquirer is Universal Computer, based in Houston and with some 2,600 employees. This deal of course includes debt assumption, and is valued at a total of $2.8 Billion. R&R provides IT and business services for US auto dealerships.

Aleris International (ARS) was the true winner of the new private equity deals. It gained 28% to $53.00 after a $52.50 cash offer (hoping for a premium boost of course) from Texas Pacific Group. This deal is valued at $1.7 Billion after the assumption of debt. Aleris was formed in 2004 as the surviving company after the merger of Imco Recycling Inc. and Commonwealth Industries Inc. Debt financing has been arranged through Deutsche Bank.

Using a P/E ratio is where investors often begin their search, but there is much much more to consider. One of the best things is to consider the operating structure if they do not have to be public and do not have the same regulations. Another is to consider free cash flow and how long the debt structure can be put off. Just to prove that you cannot use a simple P/E ratio as the main metric of any deal, look the current and forward 2006 year end P/E multiples:

RMK 19.3, 20.3

REY 74.9, 24.8

ARS 22.75, 11.3

While these deals seem like they are becoming commonplace, you should expect many more deals in the coming months. Over the last 2-years private equity firms raised an unbelievable sum that could allow for buyouts additional buyouts to the tune of $500 Billion more if you include the leverage from the debt components. Private Equity firms are also still raising funds and to be frank, it isn't getting a big mention anymore if the funds raised in each fund are not around the $10 Billion mark.

Jon C. Ogg
August 8, 2006
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