from The Australian January 11, 2012PRIVATE equity giant KKR...

from The Australian January 11, 2012
PRIVATE equity giant KKR could pay more than $700 million for clothing and homewares wholesaler Pacific Brands, say analysts.
After PacBrands yesterday confirmed it was in takeover negotiations with KKR, Credit Suisse analyst Grant Saligari today said KKR could afford to pay 80c per share, which would give the target company a market valuation of $730m.
Based on a typical private equity rate of return of between 15 and 20 per cent, Mr Saligari said PacBrands' estimated earnings before interest, tax, depreciation and amortisation suggested a potential acquirer could pay 80c per share for the company.
"We expect Pacific Brands to consider a takeover proposal by KKR," he said.
Shares in PacBrands were trading down 1.5c at 62.5c per share in morning trade today in a positive broader market, after surging as much as 20 per cent yesterday on news of the takeover approach.
However, the company could be worth as little as 65c per share if PacBrands were to suffer a 25 per cent decline in EBITDA as a result of further falls in revenue and tighter margins as the Australian dollar falls from its current highs against the US dollar, Mr Saligari said.
Deutsche Bank analyst Paul van Meurs estimated KKR could pay 70c per share for PacBrands.
In addition to purchasing all of the company's issued shares, KKR would also have to take on PacBrands' balance sheet debt, which Mr van Meurs estimated at about $200m, down from $227m at the end of the past financial year.
"While we see limited scope for cost savings in the group's current format, the potential returns on offer suggest that a deal is definitely possible," he said.
"Pacific Brands has suffered from both the macro issues plaguing Australian retail over the last two years and some that are specific to the group.
"However, there did appear to be an anomaly between the group's cash generation and its valuation. While the group probably hoped that its buyback would close that gap, private equity seems prepared to give the group the benefit of the doubt before the sharemarket."
Andrew McLennan, an analyst at Commonwealth Bank, said PacBrands' "long suffering investors" would unlikely accept 66c a share.