Friday, July 14, 2006

Hit #105

Petco Animal Supplies (PETC) is being taken private by Leonard Green and Partners and Texas Pacific Group for around $1.8 billion. This cash offer of $29/share is a premium of 42.5% over my average cost per share of $20.35. The premium is rich and I think the buyers overpaid, but I won't complain too much. The private equity groups and their sophisiticated investors must know lot more than I do!

I had started buying Petco shares recently after a pullback made it attractive. But I also saw a potential risk associated with the slowing housing market. Like a number of other sectors of the economy, the petcare industry received a big boost over the last couple of years due to high home-equity withdrawals. That party ended a few months ago, and the impact will be felt for the next few years.

Others who are likely being watched by private equity groups -
  • Borders (BGP), which is now worth buying after yesterday's warning and the subsequent share price drop. Borders is definitely a worthy candidate for a management buyout. The current yield is also attractive and I don't see the dividend being slashed.
  • Gap (GPS) : the turnaround isn't even visible yet, but the price and the yield look tempting.
  • Radioshack (RSH) : has rebounded recently. I would wait for another pullback. Like Gap, the brand identity will be attractive to potential buyers.
  • Bed, Bath and Beyond (BBBY) : this may have to fall some more before it becomes a buy. Competitor Linen 'n Things was taken private earlier this year. In a crashing real-estate market this stock can go down a lot more.
Many players in the retail sectors look attractive today at first sight. But, as some of the retail industry earnings related warnings/misses show, the rapidly cooling housing sector is starting to take its toll. Many, like Home Depot, Starbucks, Target, Best Buy, Brunswick, will fall sharply over the next few weeks as the extent of the slowdown becomes obvious. For retail entities like these I will need atleast a 50% discount to current prices before I consider them seriously.
Previous hit - Encore Medical (#104)


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