Legendary leveraged-buyout (LBO) firm Kohlberg Kravis Roberts struck gold on Friday, as a company in which it owns nearly an 80% interest, child-care and preschool operator KinderCare (OTC BB: KDCR.OB), announced it will be acquired by privately held Knowledge Learning in a transaction set to close before the end of the year.
Now if you were reading closely, you probably noticed the strange ticker symbol for KinderCare -- it's not one you'll see often on the Fool, where we tend to eschew penny stocks and unlisted companies alike. But KinderCare is no penny stock, nor even a penny company. As of Friday's close (preceding Friday's announcement), KinderCare's shares fetched $12 even (far from the border of penny stock land, which tops out at $5). And the company has a pretty sizeable market cap, too: It's worth nearly $240 million.
Or rather, it was. As of this morning, KinderCare's market cap should shoot to the moon, because Knowledge Learning is offering to buy it out at the princely sum of $25.94 per share (with $24.74 of that up front and $1.20 paid one year after closing). That's more than a 100% premium, folks. But is the company worth the price?
According to its numbers, the answer is "probably not." Even at Friday's closing price, KinderCare looked to be overvalued. It has generated $41 million in free cash flow over the past 12 months. And it has an enterprise value (made up of roughly one-part market cap to two-parts debt) of $670 million, giving the company an EV/FCF (enterprise value-to-free cash flow) of 16. To qualify as a bargain, KinderCare would have to have either a growth rate or a return on equity of about 16% -- but it has neither. Yahoo! puts the company's ROE at 5% and its earnings growth at 10%, while punting on the question of revenue growth. To get that number, you can either navigate the intricacies of the SEC's website or just drop by Hoovers for a quicker answer. There, we see Yahoo!'s one-year earnings growth number confirmed, alongside a revenue growth rate quoted at just 2%.
In other words, "penny stock" or not, KinderCare was already expensive before this deal was announced. Tack another $13 and change onto its share price, though, and the company looks positively overpriced. Whether this means that there's something wonderful about KinderCare that's not reflected in its numbers or just that KKR drives a hard bargain -- well, you can ask the people at Kraft (NYSE:KFT) subsidiary (and Altria (NYSE:MO) sub-subsidiary) Nabisco about that one -- or read the whole story in Barbarians at the Gate.
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
