Aeropostale (ARO), Others Seen as Attractive LBO Targets

April 25, 2013 1:54 PM EDT
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Shares of Aeropostale, Inc. (NYSE: ARO) are 5 percent higher Thursday in part on takeover speculation sparked by analysts at Jefferies. The firm said an LBO analysis showed the company would be extremely attractive to LBO firms even at a hefty premium.

Jefferies noted that over the past year they've seen increased LBO activity within the specialty retail space, which could continue. "Given the significant cash balances at these companies, little to no debt (ex-leases) and business models with consistent cash generation, we think the specialty retail sector holds potential for future leveraged buyouts," analyst led by Randal J. Konik said.

After screening 24 retail companies they found that the Internal Rate of Return (IRR) was 18% on average, which compares to the high-teens hurdle rate for many LBO firms.

Companies most attractive in the screen, in order of most attractiveness, were Aeropostale (NYSE: ARO), rue21, inc/ (NYSE: RUE), and Abercrombie & Fitch (NYSE ANF).

Aeropostale had a base case IRR at 31%, according to the analysts. At a 40% premium ($18 takeout price) the firm calculate an IRR of 25% and at a >50% premium ($20 stock price) the IRR 19%.

Jefferies remains bullish on the group and think retail stocks are still headed upwards on a multi-year run driven by: 1) lean inventories in the retail environment; 2) upside to margins with raw material tailwinds in 1H' calendar 2013; 3) improving consumer sentiment; and 4) retailers about to embark on a significant acceleration in FCF.

Shares of Aeropostale are up 5.5% to $14.25, rue21, Inc. (NYSE: RUE) is up 5.3% to $31.52 and Abercrombie & Fitch (NYSE: ANF) is up 4%.

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