Roundtable: The Next Buyout

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The buyout-rumor knitting circle was giddy last week. Word leaked that Motley Fool Stock Advisor core stock Hasbro (NYSE: HAS  ) was entertaining a buyout offer from a private equity firm. Shares soon shot up on the prospect of a healthy premium.

The toy giant ultimately squashed the rumors, but it got me and my fellow Stock Advisor analysts thinking about which company could be the next buyout target for the billions of dollars of private equity cash sitting on the sidelines.

Here are some ideas.

Matthew Argersinger, analyst
Content is King, or at least that's the idea you might get from a quick peek at our Stock Advisor scorecard. Hasbro is just one example of a rich library of entertainment content that's just waiting for management (or others) to monetize in newer and bigger ways.

Whether it's story-based games such as Mafia, strategy games such as Civilization, or first-person-shooters such as Bioshock, Take-Two Interactive's (Nasdaq: TTWO  ) rich portfolio of intellectual property is the envy of the video game industry. And let's not forget about Grand Theft Auto, which virtually guarantees $1 billion to Take-Two's coffers every time a sequel is released.

Yet Take-Two has suffered from a history of managerial missteps and inconsistent profitability. It is no surprise then that it's been the subject of buyout attempts in the past, including a fairly rancorous attempt by rival Electronic Arts back in 2008. That deal fell through, but private equity titan Carl Icahn recently bought a 10% stake and muscled his way onto Take-Two's board.

Only time will tell if Icahn's domineering presence results in a take-private deal. But with such valuable assets and a severely beaten-down stock price -- buyout or not -- I think Take-Two is a market-beater from here.

Andy Cross, associate advisor
Along with content, cash is also king -- at least in the private equity world. That's why buyout firms often target companies that generate prodigious cash flows that can go toward paying down hefty borrowings or cashing out investors. But profitable, well-run companies make not only good acquisition candidates but also solid long-term investments. Just the kind Tom and David Gardner look for at Stock Advisor.

One stock I've been watching is Neogen (Nasdaq: NEOG  ) , a maker of food safety testing kits and veterinarian products. This small-cap company rings up plenty of cash that it uses to make small acquisitions to grow its niche businesses. During the past five years, it grew its revenues 16% per year and operating earnings by 24%. Its balance sheet is debt-free, and its founder and CEO owns more than 4% of the company. The stock has smoked the market so far this year and sells at an above market earnings multiple, but at the right price, Neogen looks worth a nibble.

Bryan White, analyst
Private equity firms have it tougher today than they did during the past decade when growth in asset prices and cash flow was abundant. Leveraged investments made during the credit boom paid off pretty well, but now the outlook looks much different. That said, two areas in the health-care space where growth appears attractive are health information technology (IT) companies and staffing firms for health-care facilities. And that growth could attract some eager private equity eyeballs.

While most health IT names have run up, Athenahealth (Nasdaq: ATHN  ) has lost about half of its value over the past six months due to lawsuits surrounding accounting errors. Electronic health record adoption over the next three to five years should provide a large enough tailwind to raise most ships in this space, and Athenahealth looks the cheapest.

One of the problems with expanding health insurance to all Americans is that demand for services may far outstrip supply of physicians and nurses. Cross Country Healthcare stands to benefit because facilities will need to staff before the full expansion of coverage takes place around 2014. With robust cash flows and limited capital expenditures, Cross Country could be just what the doctor ordered for private equity investors.

Alex Scherer, associate advisor
Transaction processors always seem to garner interest from private equity investors. Fidelity National Information Services (NYSE: FIS  ) only last month rejected a private equity offer led by the Blackstone Group, before leveraging up to issue a large special dividend. These firms produce stable revenues and high free-cash-flow margins, and can grow without reinvesting much of that cash into the business. That adds up to plenty of cash flow to support the high debt loads private equity firms use to juice those leveraged buyout (LBO) returns.

One company in this space that I've had my eye on for a few years is Global Cash Access (NYSE: GCA  ) , which operates ATM and cash access systems for the gaming industry. Global Cash has already been through the private equity ringer once, going public in 2005 less than a year after private equity bought it from First Data, a large transaction processor also bought out by private equity in 2007. In terrible disarray in 2007 with both CEO and CFO departures, Global Cash has retrenched, gobbled up a few competitors, and now dominates a duopoly market with Global Payments (NYSE: GPN  ) running a distant second place in market share.

Global Cash still has $250 million in debt from the original LBO, but supports the interest payments easily. At only 7 times enterprise value to free cash flow and room for more debt if needed, Global cash could be one to ring the private equity cash register.

For more market-beating stock ideas, whether through buyouts or long-term appreciation, join Motley Fool co-founders Tom and David Gardner at Stock Advisor. You can also follow the Stock Advisor team on Twitter.

Andy Cross compiled this roundtable. He doesn't own shares in any company mentioned. Take-Two Interactive Software is a Motley Fool Rule Breakers recommendation. Electronic Arts and Hasbro are Motley Fool Stock Advisor choices. The Motley Fool has a disclosure policy.

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