Rackspace (RAX): WSJ's $27 Is Too Low - Oppenheimer
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Oppenheimer analyst, Timothy Horan, reiterated his Outperform rating on shares of Rackspace (NYSE: RAX) after the WSJ reported that RAX was in advanced talks to sell itself to Apollo Group for $3.5B, or $27/share. The analyst believes this is low and that a deal in the $32 area is more likely given his assumptions that the company could cut OPEX by 20%, decrease capital intensity of the business to 10-15% of revenue and increase leverage to ~4x EBITDA. At $32, or $4.3B, 30% equates to ~$1.3B in equity. Using an 8x EBITDA estimate (RAX's three-year average) on an estimated $1.02B by 2021 (equating to an 8% CAGR from our 2016 estimate), he believes a PE firm could exit with just under a 30% IRR.
Using this valuation as a takeout rationale, the analyst, is increasing his target to $32 from $30,
Shares of Rackspace closed at $29.27 yesterday.
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