rue21, inc. (RUE), Aeropostale, Inc. (ARO), American Eagle Outfitters (AEO): Are These Companies Buyout Targets?

Good deals for private equity

Aeropostale, Inc. (NYSE:ARO) has an enterprise value of approximately $1 billion dollars, so a bid similar to rue21’s would have to come in around the $1.2-$1.25 billion range. The company has no long-term debt on the books and $148.4 million in cash. It has a history of being operating cash flow positive, but not of generating free cash flow. The company has plans to develop new stores, and blamed recent poor result on bad weather and heavy discounting. A private equity firm could find Aeropostale, Inc. (NYSE:ARO) an interesting acquisition given the fact that it could likely support the debt required for a buyout and the company is trading at a depressed level.

American Eagle Outfitters (NYSE:AEO) is a more expensive proposition for private equity, but it also has much stronger cash flows. The company has an enterprise value of $3.36 billion, has no long-term debt and has $631 million in cash on the books. It has a history of strong operating cash flows, and levered free cash flows of $358.73 million. Despite the higher price required to buy out the company, cash flows could support the debt levels required to finance the buyout.

Aeropostale, Inc. (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO) could both be potential targets for private equity if the appeal of teen retailers continues. Aeropostale, Inc. (NYSE:ARO) appears to need more work, but it is also a cheaper opportunity and could be a steal at current equity values. As an investor, I would prefer to be in American Eagle Outfitters (NYSE:AEO). The company has a larger portfolio and stronger cash position. It also pays an impressive divided of 2.2%, so I get paid to wait for a buyout or stronger sales growth.

The article Are These Companies Buyout Targets? originally appeared on Fool.com.

John Timmes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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