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MARKET WATCH Turning Ugly Ducklings Into Golden Geese

By Gretchen Morgenson

NEW YORK — While the New Economy continues to rule the hearts, minds and wallets of most investors, there appears to be a stirring among the Old Economy stocks left for dead on Wall Street. Shrewd institutional investors, who know a bargain when they see one, and corporate managements, fed up with problems that depressed share prices present, are taking companies private.

Two deals announced last week characterize the nascent trend. United States Can, a maker of plastic and steel containers, said on Wednesday that an investment group led by the chairman of the company planned to buy it for $282 million. The offer was a 41 percent premium to the stock’s price before the announcement. The shares, which closed Friday at $19.6875, still trade at only 12 times earnings.

A day earlier, senior managers at Cameron Ashley Building Products made a move to take their company private for $328 million. The offer carried a 21 percent premium to an earlier bid. At its closing price Friday of $17.4375, Cameron Ashley is trading at around nine times earnings.

“As everybody knows, there has been a huge flight of capital into dot-coms — technology or biotech,” said Paul L. Schaye, a principal at Chestnut Hill Partners, a firm that advises private equity investors.

“That sucking sound has left everybody else saying ‘What about me?

“The what-about-me’s are legion.” Schaye said, “There were hundreds of publicly traded companies with relatively few shares outstanding, price/earnings ratios of less than 9 and current values of less than $1 billion. Those with solid businesses may become buyout targets, rescuing shareholders and managements from oblivion.”

“Some old economy companies that are trading at 3 to 6 times cash flow were trading at 7 to 12 times 2 years ago,” said Dan O’Connell, chief executive of Vestar Capital Partners, which manages $3.6 billion in private equity investments. “We probably meet with two to three management teams a day that are considering going private.”

Going private appeals to these managers because their depressed stock prices make strategic acquisitions using their own shares prohibitively expensive. Investors like the going-private deals because they can acquire valuable assets at cheap prices. Annual returns of between 20 percent and 30 percent are common. And with stock prices so depressed, even an investor taking on substantial debt for a buyout can still make the numbers work.

Indeed, the premiums to market price that acquirers paid in going-private transactions rose significantly last year. Mergerstat, a supplier of global merger and acquisition data, reports the median premium paid in 1999 was 32.7 percent, up from 20.4 percent the year before.

Adding to the lure of Old Economy buyouts today is the fact that earnings in some beaten-down sectors could soar this year. Steven Weiting of Salomon Smith Barney expects earnings at basic materials companies and energy concerns to grow 41 percent and 50 percent, respectively, in 2000. He also sees strong growth in the capital goods sector.

Investors looking to take companies private have amassed quite a war chest — $350 billion by one estimate. Even if half of this goes into technology companies, that still leaves a good chunk of change for action among the have-nots.