If you have been following the deal pages recently, you may have heard about the deal to take rue21, inc. (NASDAQ:RUE) private… again. You see, Apax Partners, the private equity firm that took rue21, inc. (NASDAQ:RUE) public back in 2009, has now offered to buy the company for $1.1 billion. Apax currently owns 30% of the stock in the company. The offer represents $42 per share, or roughly a 20% premium over the company’s current stock price at the time of the offer. rue21, inc. (NASDAQ:RUE)’s CEO sates that the transaction would allow the company to expand its footprint, strengthen its e-commerce presence, and launch a new brand.
rue21, inc. (NASDAQ:RUE) operates as a specialty retailer of junior girls’ and young mens’ apparel and accessories in the United States. The company operates 900 stores in 47 states and has been in operation since 1976.
Investors praised the deal for the company, but there is some reason for concern. The company’s Board of Directors is currently being investigated by a host of law firms for breach of fiduciary duty. The law firms are seeking to learn if the board properly shopped the company around before accepting the offer from Apax Partners. Given Apax’s large stake in rue21, inc. (NASDAQ:RUE), the deal was likely to draw legal attention. While the future of the investigation is unknown, investors should be aware that a break-up of the offer will likely cause the stock to drop to at least pre-offer levels.
While rue21, inc. (NASDAQ:RUE)’s situation remains unclear, the offer draws attention to other teen retailers and whether they also might be targets for private equity buyouts.
Other targets
Aeropostale, Inc. (NYSE:ARO) operates as a mall-based specialty retailer of casual apparel and accessories. The company currently operates 906 stores in 50 states and Puerto Rico, 78 stores in Canada, and 103 “P.S. from Aeropostale” stores in 22 states. The company recently reported a brutal first quarter, with net sales decreasing 9% and comparable sales decreasing 14%. It also reported a net loss for the quarter of $12.2 million. The company did see an uptick in its e-commerce business, however, with net revenues rising 13%.
American Eagle Outfitters (NYSE:AEO) operates as an apparel and accessories retailer in the United States and Canada. The company operates 893 American Eagle Outfitters (NYSE:AEO) stores, 151 aerie stand-alone stores, and 49 franchised stores in 13 countries. It also has an e-commerce presence in 81 countries. The company also reported a rough first quarter, with sales decreasing 4% and comparable sales decreasing 5%. Operating income decreased by 11% as a result. The company guided to flat sales growth in the second quarter.
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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