DEALTALK-PE firms could hug Build-A-Bear with a healthy premium
(For more Reuters DEALTALK stories click on [DEALTALK/])
* Potential sales rise in holidays add to the lure
* High cash flow, low debt load make co attractive to PE
By NR Sethuraman and Renju Jose
BANGALORE, Dec 21 (Reuters) - If Build-A-Bear (BBW.N) plans to sell itself -- as recent reports have suggested -- some analysts said the toymaker could command a healthy premium from private equity firms due to its high cash flow and low debt load.
"It would be unlikely that Build-A-Bear would be taken private at a price less than their 52-week high of $9.76 a share, and without some premium (on top of) that," said Ben Axler, managing partner at investment firm Spruce Point Capital Management.
This would imply that Build-A-Bear, which has about 20 million outstanding shares, could command a price of at least $10-$11 a share.
But Brad Leonard of BML Capital Management, Build-A-Bear's second largest shareholder, thinks the number could go as high as $16 a share. "(But) anything around $11-$15 is going to be a reasonable range for investors," he said.
BML Investment Partners holds about 2.2 million shares of Build-A-Bear, according to Thomson Reuters data.
Earlier this month, Bloomberg reported that St. Louis-based Build-A-Bear had approached PE firms to sell itself. [ID:nSGE6B20BS]
Graphics on Build-A-Bear's performance
Analysts said an expected sales boost during the holiday season should add to the stock's attractiveness.
"Build-A-Bear's is a seasonal business and they build significant cash during the holiday season. Another successful holiday season this year and proof of cash flow growth could increase the valuation of the company," Axler said.
Richard Gottlieb, CEO of USA Toy Experts, said, "This is going to be a good year for the $22 billion U.S toy industry, as it is expected to grow about 2-3 percent in 2010."
Still, any offer will be below the $20-plus range that the stock was trading at when the company first started looking at strategic options in mid 2007.
The 2007 exercise did not yield significant offers as credit markets were then in the early stages of an epic contraction.
But an offer from private equity will make a lot more sense now, when the credit environment has rebounded and PE firms are looking to use their cash reserves before their investment periods end.
"Build-A-Bear's high cash flow generation, healthy balance sheet, and unique brand concept and brand presence both domestically and internationally provide a solid platform for future growth," Susquehanna analyst Thomas Filandro said.
PE deals, whose volumes have more than doubled this year, are also being driven by increased pressure on funds to spend amid talk of potential looming tax increases. [ID:nN22232960]
In October, private equity firm Bain Capital bought kidswear maker Gymboree Corp GYMB.O for $1.8 billion, and in late November Kohlberg Kravis Roberts & Co (KKR.N) announced a $4 billion deal to acquire Del Monte Foods Co DLM.N.
In the past, small cap retailers like stuffed toy maker Vermont Teddy Bear Co and outdoor products retailer Gander Mountain Co have gone private, saying their undervalued stocks did not justify the high costs of being a publicly held company.
"If Build-A-Bear becomes a private company, it would be able to extract additional costs out of its business, as there are regulatory and compliance costs associated with a public company," Spruce Point's Axler said. (Reporting by NR Sethuraman and Renju Jose in Bangalore; Editing by Jarshad Kakkrakandy)
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