What Would Goldman Do?

In late March, Goldman Sachs distributed some institutional client research detailing its leveraged buyout model. I only got leaked a copy yesterday, so apologies for the tardiness.

The 46-page document is about half boilerplate and marketing materials for an interactive LBO return calculator, which apparently is accessible to Goldman clients. The rest, however, reads like a recommended list of public takeover targets.

Specifically, Goldman has plugged 937 non-financial companies into its calculator, in order to determine projected five-year IRRs. It assumes a 20% purchase price premium, with the median IRR coming out to 10.6 percent. Given that the typical IRR hurdle rate is around 20%, most of the companies Goldman analyzed were not considered buyout-worthy. On the other hand, it did come up with 16 companies that not only got past the hurdle rate, but also surpassed the 50% IRR mark.

The top dogs were: Performance Food Group Co. (PFGC) at a 75.7% projected IRR, SuperValu Inc. (SVU) at 74.7%, CB Richard Ellis (CBG) at 71.3%, Sunoco Inc. (SUN), Alexander & Baldwin Inc. (ALEX) at 70.4%, Circuit City Stores Inc. (CC) at 69%, Unisys Corp. (UIS) at 65.6% and Rite Aid Corp. (RAD) at 65.6 percent.

It also provides a list of stocks whose projected IRRs currently are below 20%, but which it believes could be lifted above the hurdle via operational restructuring (which I thought was usually standard in an LBO). These include Diamond Offshore Drilling (DO), Burger King (BKC), Atwood Oceanics (ATW) and The Ryland Group (RYL). Finally, it suggests that companies like The Finish Line Inc. (FINL), Valero Energy Inc. (VLO), P.F. Chang’s (PFCB) and OfficeMax (OMX) are primed for leveraged recaps.

I should also point out one giant caveat to everything I just wrote: None of the projected IRRs are based on specific buyers. Instead, they are offered in a vacuum – even though we all know that certain firms are better post-deal than others. Moreover, many buyout offered assume cost-savings based on synergies with existing portfolio companies, or because of inside industry knowledge.

Two brief examples related to yesterday’s U.S. Foodservice deal: Wellspring was a (losing) bidder, in part, because it already owned food distribution platform Vistar. Moreover, CD&R bid, in part, because it had once owned something called Alliant, which it had sold to U.S. Foodservice a couple of years back.