Who's Next On The List Of Leveraged Buyouts?

has compiled a list of 12 companies it believes are ripe for a leveraged buyout. Analyzing candidates the way private-equity firms do, Barron's chose to focus on companies with modest debt that trade for reasonable multiples of earnings and pretax cash flow. For example, Gap, Inc.

trades at about $19.90, or 11 times projected 2010 profits. Whirlpool Corporation

trades for $86.08, fetches roughly 11 times projected profits. Trading for just under $16, Seagate Technology

is valued at 7.5 times projected profits in its current fiscal year. Western Digital Corporation

, which trades at $31.28, is valued at nine times projected profits. One investor told Barron's that just about any company trading for 12 times earnings or less that isn't capital intensive can get LBOed in this market. The bond market deserves some of the credit, as it is now much more receptive to LBOs than it was in 2006 and 2007. The retail sector has also been popular with private equity, Barron's notes, pointing out that Toys "R" Us, Neiman Marcus and Michaels Stores have all gone private in recent years. Part of the reason why private-equity firms are so eager to complete these transactions is because they're sitting on tens of billions of dollars of commitments from institutional investors. If they don't continue to invest the money, they'll be forced to free the investors from those commitments. “Most private-equity firms focus on a key financial ratio that seeks to measure a company's debt-carrying ability: the company's enterprise value, which is stock-market value plus any net debt (debt less cash), divided by pretax cash flow, usually earnings before interest, taxes, depreciation and amortization,” writes Barron's Andrew Bary. “Attractive LBO candidates are generally valued at five times cash flow or less, although dominant businesses can look good at higher valuations. Gymboree, for example, traded around four times cash flow before the buyout speculation last month.” Bary concludes by saying that the bottom line is that companies without heavy capital requirements and with strong balance sheets are strong candidates for LBOs, thanks in part to a friendlier bond market. “It's entirely possible that none of these dozen companies will be taken private in an LBO,” he says, “but the characteristics that make them attractive to private equity could also appeal to strategic buyers or simply make them good investments.”