What we're looking for
Low leverage, high cash-flow Canadian companies that could be buyout targets for private equity.
What we found
We ran a Bloomberg search for S&P/TSX composite index companies with high free cash-flow yields and less than two times debt to earnings before interest, taxes, depreciation and amortization (EBITDA).
Four names are striking on our list:
CGI Group Inc. The information technology and business information company offers a free cash-flow yield of 11.4 per cent and a balance sheet with debt that's 1.29 times EBITDA. It's also in an industry that's drawn private-equity interest in the past. CGI has a market capitalization of $6-billion, however, making it a big bite for even a group of bidders.
Davis + Henderson The company, which provides services to financial institutions, has a free cash-flow yield of 10.1 per cent and a balance sheet with debt of 1.75 times EBITDA. The company is perhaps best known for making cheques, but it has expanded into providing all sorts of technology services for financial institutions. And it trades at a low price-earnings multiple of 9.5 times.
CCL Industries The specialty packaging company offers a free cash-flow yield of 8.5 per cent and debt of 1.6 times EBITDA. CCL makes things such as labels and containers, the sort of steady, under-the-radar, often-underappreciated business that appeals to many private equity buyers.
TMX Group Inc. The exchange operator has a free cash-flow yield of 9.7 per cent and a balance sheet with debt of 1.24 times EBITDA. This one is already the target of a leveraged buyout in the form of the hostile bid from the Maple Group of Canadian banks and financial institutions.
There are some other interesting names near the top of the list, from the airline and forestry industries, but their businesses may be too cyclical to appeal to private equity buyers.
For example, West Fraser Timber offers a 15.6-per-cent free cash-flow yield and a balance sheet with debt that's only 0.7 times EBITDA. Canfor Corp. isn't far behind, with a free cash-flow yield approaching 14 per cent and leverage of 0.8 times EBITDA.
This column is adapted from Boyd Erman's Streetwise blog at tgam.ca/Cfjj