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Corning Inc. Message Board

  • blueskydriving blueskydriving Feb 5, 2013 12:43 PM Flag

    GLW is another LBO that makes sense!!

    What are the characteristics of a good LBO candidate -- low leverage (they want to replace expensive equity with cheap debt), high, stable free cash flow EBITDA, and a low PE ratio (since the biggest part of the LBO strategy is to buy the target at a low PE (cheap) and to sell it again in 3-5 years (typical) and they are trying to double their cash-on-cash (CoC) in that timeframe.

    CoC is calculated as the final value of the equity investment at exit divided by the initial equity investment, and is expressed as a multiple. Typical LBO investments return 2.0x - 5.0x cash-on-cash. If an investment returns 2.0x CoC, for example, the sponsor is said to have "doubled its money".

    So, let's take a closer look:
    1) Is the company deeply undervalued?
    GLW's current price-to-book ratio .81x
    DELL's current price-to-book ratio 2.26x

    2) Who has high, stable free cash flow?
    GLW's EBITDA is $2.46 Billion
    DELL's EBITDA is $4.4 Billion

    But. to get the real picture we must compare those numbers to the potential takeover price ...they typically use enterprise value as a "floor price" but since we have better numbers for Dell ($24.4 Billion) we can use that for a realistic comparison (enterprise value = market cap + total debt -cash) ... so, Dell's Takeover Price/EBITDA is $24.4/4.44 = 5.54...

    So, Michael Dell and Silver Lake are paying $5.54 per dollar of EBITDA

    If we use GLW's enterprise value as the floor price for an LBO, the acquirer would be paying roughly $5.95 per dollar of EBITDA
    (14.65/2.46 = $5.95)

    3) Let's finish with PE comparisons (cheapness):
    GLW's Forward PE is 9.29x
    DELL's Forward PE is 8.07x
    In conclusion, GLW has over $6 Billion in cash and a current debt load of $3.5 Billion ... as a guide, a LBO looks to use 2.5x EBITDA as total debt at the conclusion of the deal ... for GLW that would be (2.5 x 2.46 = $6.15 Billion in debt total outstanding (or $3.65 Billion more than now) ... so, with the $6 Billion in cash plus another $3.65 Billion in debt the acquired would have $9.65 Billion from GLW towards the acquistion ... therefore they would only need to come up with an additional $5 Billion to acquire GLW at the current Enterprise Value ("floor price") ... if you added at 20% premium to the current share price (say$14.28), they would need an additional $3.4 Billion for a total of $8.4 Billion

    So, if you consider that Private Equity could acquire GLW at a 20% premium with only $8.4 Billion of their own monies and earn $2.0+ Billion in net income each year (including dividend funds) for 3-5 years while expanding operations and cutting costs then do another IPO in a new economy 3-5 years from now to double their cash-on-cash, then GLW is another LBO that makes sense.
    Yes, I bought yesterday ... not really for an LBO play ... but, it could happen ... glta

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    • A leveraged buyout requires high levels of debt in the target.
      (GLW clearly doesn't fit the bill with debt at less than 10% of total assets.)

      Debt doesn't vote; if a company has 50% of the balance sheet covered in debt & someone buys a 5% stake they've got a huge voting block.

      I'd recommend reading "Predators Ball" which details the LBO's created by Michael Milken (an excellent treatise on how this process works...)
      The deal with Ron Perlman & Revlon is a wonderful example of the creation of value through an LBO or "How to get rid of fat cat BOD's!

      I'm long on GLW based on superior product, R & D & the present valuation makes it what I call a buy/put/long strategy (take a pos & start selling puts to average into a nice long pos.)
      No hurry as it's been trading sideways.

      Sentiment: Strong Buy

    • Now think about samsung buyin glw .With them using tons of there glass now and being in control of gorrila glass they could charge every other company say double for the glass.The companies either pay or make an inferior product samsung wins either way.Samsung would be a perfect canidate to buy glw.

      Sentiment: Buy

    • Excellent post, thank you for sharing an on topic message.
      Go GLW

    • Since LBOs seem to be the topic of the day on CNBC, I just wanted to remind anyone here that actually cares about GLW that we are a very, very strong LBO candidate (and my reasoning why in original post) ... now, back to your politics

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