Bear Stearns sees wave of manufacturer buyouts

CHICAGO Mon Jun 18, 2007 12:56pm EDT

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CHICAGO (Reuters) - The private equity-fueled buyout craze that has taken dozens of U.S. public companies private in recent years is likely to move into the U.S. manufacturing sector, which has largely escaped the feeding frenzy so far, according to analysts at Bear Stearns.

During an invitation-only conference call on Monday, Victor Consoli, Bear Stearns corporate credit strategist, and Ann Duignan, Bear Stearn's manufacturing analyst, said that a large number of companies in the sector appeared to be promising takeover targets, including diversified manufacturers Illinois Tool Works Inc. (ITW.N) and Parker Hannifin Corp. (PH.N) and farm machinery maker Agco Corp. (AG.N).

Consoli said the buyout wave could kick off in the coming weeks "before Europe goes to sleep" for the summer and "before rates back up."

Also contributing to the pressure on the sector: what Consoli described as "massive war chests of private equity capital" and a willingness among buyout firms to accept lower returns from their investments.

A "reasonable" return is in the mid-teens these days, Consoli said, down from the low 20s earlier in the buyout cycle.

Consoli said that Ingersoll Rand Co. (IR.N) was also a top buyout candidate, in part because of the pending sale of its Bobcat unit for $3.2 billion. The sale, which would add more than $10 a share of cash to Ingersoll Rand's balance sheet, could prompt activist investors to put pressure on the company.

"If they can't immediately deploy that capital ... someone's going to rattle their cage," Consoli said.

Not every manufacturer that Bear Stearns looked at screened high as a buyout candidate.

For instance, industrial conglomerate Danaher Corp. (DHR.N) and Dover Corp. (DOV.N) didn't show up in his analysis as promising takeover targets, Consoli said.

And he cautioned that even companies that scored high weren't sure things.

The key question, he said, was this, "Does management want to sell at these prices," which in most cases would be an opening offer that represented a 10 percent premium to the company's current stock price.

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