Morningstar’s Top Takeover Candidates: American Eagle, Akamai, Synovus

What companies are prime candidates for a takeover?

American Eagle, Akamai Technologies and Synovus Financial made a top 10 list of companies that Morningstar thinks could get bought out. Other contenders include Clearwire Corp., Cloud Peak Energy, Leap Wireless, Myriad Genetics, Petrohawk Energy and Range Resources.

The companies are significantly undervalued, says R.J. Hottovy, Morningstar’s director of consumer research and editor of the report, “Credit Markets Primed for Increased M&A Activity.”

“These are the names of the undisclosed gems that could be taken over,” Hottovy says. “But even if they aren’t, we think they are attractively valued.”

American Eagle, a youth-oriented retailer, is very beat up and meets the “perfect” criteria of an LBO target, Hottovy says. This includes lots of cash and minimal debt. (AE has total cash of $668 million and debt and roughly $6 million of long term debt as of Jan. 29, according to a press release). American Eagle’s board has also been willing to look at potential transaction, Hottovy says.

Any LBO of American Eagle would require about $1.9 billion in additional debt, Morningstar says. So a bid would likely be in the $20 to $24 range, which is 8-9x forward EBITDA, Morningstar said. “To us, [American Eagle] does meet the criteria of a typical LBO candidate,” Hottovy says.

Akamai, by contrast, is not an LBO target, Hottovy says. The Cambridge, Mass.-based company provides “an array of interconnected servers” to speed online content from providers to consumers. Akamai, Hottovy says, is better suited to a strategic buyer. Google, Apple, Cisco have been rumored to be interested. Shares have dropped 25% in 2011 which makes Akamai more digestible, Morningstar said.

Retail and restaurants will continue to be attractive to PE firms since these companies don’t often have logical strategic buyers, Morningstar said. Aeropostale, OfficeMax, Williams Sonoma, Wendy’s Arby’s Group, GameStop, Carter’s and Canadian Tire are some top buyout candidates, Morningstar said.

One thing Morningstar doesn’t expect to come back in 2011? Club deals. Large consortium deals of the mid-2000s generated poor returns (TXU or First Data anyone?) and LPs are now steering GPs toward mid-cap and small-cap transactions, Morningstar said. “Club deals are not likely right now,” Hottovy said. “It’s going to take some time until we’re at that point.”

But mega deals, those transactions in the $10 billion-plus range, may make a comeback this year. “The credit markets are willing to accept enough risk to make $10 billion to $15 billion deals happen,” he says. Hottovy still expects more deals that are $5 billion-and-under range. But if large deals do return, Gap, Best Buy and Advanced Auto may be in the mix, he says.