It has been a wheeling-and-dealing year on Wall Street.
A whopping $1.52 trillion in buyouts have taken place so far in 2014 — a substantial 56% greater than in the first five months of 2013. All told, 234 transactions each valued at $1 billion or more have taken place, well ahead of last year.
Moreover, mergers and acquisitions are expected to continue at a torrid pace.
I tend to agree with those expectations, as does Barron’s, which recently published a list of 10 potential buyouts that could make their way to reality. I don’t necessarily agree with the lot of them, but three of these buyout ideas look plenty feasible, and plenty attractive.
Here’s a look at the top potential buyouts out there:
Top Potential Buyouts: #3, Alaska Air Group (ALK)
Alaska Air (ALK) might not be the largest airline in the U.S., but it’s certainly one of the most profitable.
It’s also currently in the midst of a skirmish with Delta (DAL) over the number of flights each airline offers in and out of Seattle. ALK is based in Seattle, and 53% of its traffic runs through this Pacific Northwest hub. Delta is looking to boost its international business and thus has increased the number of flights into Seattle. Any prolonged fight will hurt Alaska Air’s profitability.
There’s an old saying: “If you can’t beat them, join them.”
A better option is for Delta to simply acquire Alaska Air. Delta wants to grow its Asian business, and Alaska Air wants to remain a big part of Sea-Tac Airport. Together, they can accomplish both.
In December, Alaska Air CFO Brandon Pedersen made it clear that ALK is intent on remaining independent. In that same article, though, David James, the director of research for James Investment, suggested ALK could be worth $80 per share. It’s well above that now, trading for roughly $100.
Given ALK management aren’t inclined to welcome a takeover bid, the premium would have to be pretty substantial.
We’ll know soon enough how serious Delta is about Seattle. If so, the ultimate price paid could be close to $150 per share.
Top Potential Buyouts: #2, Scripps Networks Interactive (SNI)/AMC Networks
In February, I discussed potential buyouts that could take place within the cable industry. One of the scenarios I mentioned was a merger between Scripps Networks Interactive (SNI) and AMC Networks (AMCX). The combined entity would have three of the top cable networks in terms of viewership with AMC, HGTV and Food Network. Both companies are family-controlled, so any deal would require the support of both the Dolans (AMC) and Scripps (HGTV, Food Network).
FactSet pegs both companies’ 2014 enterprise value at 10 times EBITDA, which is less than bigger players such as Walt Disney (DIS), Time Warner (TWX) and Viacom (VIAB). If the two firms continue to operate independently of one another, they run the risk of becoming also-rans in the cable network consolidation game. Together, they have a better chance of naming their price when the big boys eventually come knocking.
The Dolans control 66% of the votes in AMC Network while the Scripps family has 92% of SNI. If you apply an enterprise value that is 12 times EBITDA for the combined business, you’re talking about a $21 billion deal in which the Scripps end up with 60% control while the Dolans are the second-largest shareholder with 23% of the votes.
Losing control of the Cablevision (CVC) spinoff will ultimately be better for the Dolans than if they try to go it alone.
This scenario’s likely a long shot, but I think it makes a lot of sense.
Top Potential Buyouts: #1, Kohl’s (KSS)
Hands down, it’s got to be Kohl’s (KSS).
Retail is sucking gas these days making for a lot of nervous executives. As Barron’s mentioned in its article, Kohl’s is coming off its worst quarterly sales performance (same-store sales down 3.4%) since March 2009. Things have got to be better if CEO Kevin Mansell wants to keep his job.
According to the Wall Street Journal, Mansell is looking for a new chief merchant that would eventually succeed him. Mansell, who is 61, could be in the job for a few years yet, so it’s hard to know who might be interested in the job. Since Mansell has been in the top spot, sales have grown by 16% to $19 billion while net income has remained flat.
In the same period, Nordstrom (JWN) has seen net income increase by 83% on a 46% jump in revenue. True, Nordstrom is luxury while Kohl’s isn’t, but Mansell has a lot of work regardless to do if he wants Kohl’s to even be in the same league as Nordstrom from an operational standpoint.
Although its net income hasn’t budged much (it did have better years in fiscal 2010 and 2011), Kohl’s free cash flow has remained remarkably robust over the past five years increasing by almost 60% to $1.1 billion. FactSet’s estimated 2014 free cash flow yield for KSS is 9.9%. Anything near 10% is very attractive.
However, Mansell can’t continue to rely on lower capital spending to bump free cash flow. Eventually, Kohl’s must increase its capital expenditures along with delivering positive same-store sales growth if it expects to build shareholder value.
Private equity has to be licking its chops. Retail industry buyouts are strong and getting stronger. Last September, The Canada Pension Plan Investment Board along with Ares Management (ARES) paid approximately 9.5 times EBITDA for Neiman Marcus. Currently, Kohl’s has an enterprise value 5.9 times EBITDA. Meeting in the middle, you can expect a potential suitor to pay $20 billion, or a premium of 40% or more, to buy the discount department store.
While it’s not impossible to imagine a $16 billion market cap for Kohl’s under current management, I believe a change at the top is necessary in order to make it happen. The board won’t make the change, so only a buyout is going to bring shareholders salvation.
That salvation could come before the end of the year.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.