Could These Two Companies Follow Dell Inc. (DELL)’s Lead?

In early February, Dell Inc. (NASDAQ:DELL) announced it would be taken private in a $24 billion deal.  The company’s shares would be valued at an offer price of $13.65 per share.  Depending on how long an investor has owned the stock, this may be seen as good or bad.  The offer price is significantly higher than the multi-year low of $9 seen in November, but nowhere near levels the stock reached in 2008 before the Great Recession.  With the Dell deal in mind, which companies could be the next to go private?

Two good candidates

Dell’s motives for going private were understandable.  While the company struggled amidst the stagnating PC market, it was still a solid generator of free cash flow with approximately $11 billion in cash on the balance sheet.  It appears that companies in private equity deals have some common characteristics:  namely, the companies tend to be strong cash flow generators with well-known brands that are in the stages of a turnaround.

One candidate that fits this description is Pitney Bowes Inc. (NYSE:PBI).  The company that provides postage meters and mail services has had a rough ride over the last few years.  Pitney Bowes began falling from $40 before the Great Recession, and unfortunately for investors, hasn’t stopped falling. The stock now trades in the low teens, despite the fact that the company is a Dividend Aristocrat, having increased its dividend for 30 years in a row.

In addition, the company generates strong free cash flows from operations, and trades for only 5 times its enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA).  The company reported full-year adjusted earnings per share of $2.18, meaning the company trades for a trailing price-to-earnings ratio of just 6 times.  The stock now yields over 10% at recent prices.  Clearly, the company isn’t getting much credit from the public markets for what it does well: big free cash flow generation and a high dividend.

Another candidate might be Best Buy Co., Inc. (NYSE:BBY).  Rumors of the “show-rooming” effect, whereby consumers go to Best Buy’s stores to look at items only to leave and purchase them more cheaply online, as well as declining sales, have caused a dramatic decline to this company’s stock price.  Trading well over $40 as recently as early 2011, the stock now trades in the teens, at a valuation of 2 times EBITDA.

Best Buy going private seemed very likely in recent weeks, on news that its founder and CEO Richard Schulze wanted to go in that direction.  However, it’s now far from a foregone conclusion, with recent news that the company rejected the CEO’s initial offer and that Schulze is experiencing trouble getting banks to line up the necessary financing.  In a Feb. 13 Wall Street Journal article, it’s being reported that now Schulze might instead try to align a group of investors to make a minority investment in the company.