June 23, 2007, 7:02 am

SLT - Sterlite

9 deals on tap upcoming week, just after the huge Blackstone ipo. http://www.tradingipos.com this week celebrated our 2nd anniversary of providing in-depth pre-ipo analysis from a trading/investing perspective on every ipo every week.

Every pre-ipo analysis piece is available to subscribers. We also have stored every piece since 3/05 and we feature a lively forum section in which we discuss ipos and give pre-open indications.

Past few weeks have featured pieces we've not been interested in buying here at tradingipos.com. We do like/own SLT however.

Disclosure: Tradingipos.com has a position in SLT at date of blog post.

SLT - Sterlite Industries

Sterlite Industries, SLT plans on offering 125 million American Depository Shares (ADS) at an estimated price of $14 per ADS. Each ADS is equivalent to one share. This offering includes 113.5 million ADS on the NYSE and 11.5 million ADS in Japan. The ADS offering in Japan will not be listed in an exchange. Merrill Lynch, Morgan Stanley and Citibank are lead managing the deal, Nomura co-managing. Post-offering SLT will have 683.5 million shares outstanding for a market cap of $9.57 billion on a pricing of $14. IPO proceeds (which will be significant at an estimated $1.65 billion) will be used for general corporate purposes.

Note - The SLT offering on the NYSE is technically a secondary as Sterlite is currently listed and traded in India on the NSE and the BSE; it is also a component of the exchanges’ major index. Over the past year, SLT's dollar adjusted shares have traded in a range of approximately $6 - $14. Like many foreign stocks trading elsewhere in the world, they tend to make their debut in the US right at all-time highs in stock price. The overall trend has been an initial 'sell the news' on the US debut, although that is not an across the board trend.

Vedanta Resources, a listed London metals and mining company will own 60% of SLT post-offering. Vedanta ipo'd in London in late 2003 and is up over 300% since ipo.

From the prospectus:

'We are India’s largest non-ferrous metals and mining company based on net sales and are one of the fastest growing large private sector companies in India based on the increase in net sales from fiscal 2006 to 2007.'

SLT operates three primary businesses in India:

1) Copper - SLT is one of the two custom copper smelters in India, with a 42% primary market share by volume in India in fiscal 2007. In 2006, SLT was the worldwide 5th largest custom copper smelter and operated two of the five lowest costs of production copper refineries in the world.

2) Zinc - SLT is India’s only integrated zinc producer and had a 61% market share by volume in India in fiscal 2007. SLT's zinc mine is the third largest in the world in terms of production and 4th largest on a reserves basis. SLT operates both zinc mining and smeltering operations in India. SLT has plans to open an additional zinc smelter over the next couple of years.

3) Aluminum - one of four primary aluminum producers in India, with a 25% market share in FY '07. In addition to current production, SLT owns a 30% minority interest in Vedanta Alumina. Vedanta Alumina has commissioned a new 1.0 million tons per annum aluminum plant in India. While initial product is expected to be shipped from the plant beginning in June 2007, it will be 2009-2010 before the plant is shipping extensive product.

In addition to copper, zinc, and aluminum, SLT is getting into the power generation business in India. SLT has experience in building and managing the seven power plants that service their metal smelting operations. SLT is now investing $1.9 billion to build the first phase, totaling 2,400 MW, of a thermal coal-based power facility expected to be complete in 2010. This is an aggressive investment for SLT, as the power plant will be 2 1/2 X's the size in terms of power generated as all of their smelter power plants combined. This facility will be used to sell power to the Indian power grid.

SLT has grown revenues swiftly the past three years due to capacity growth and commodity price increases. Really SLT has been positioned perfectly over the past 3-4 years. If this entity had come public 4-5 years ago it would be one of the biggest winners this decade. Keep in mind that here in 2007, SLT is coming to the US with a $9.57 billion market cap, far far higher than wold have been the case had they listed in the US closer to the beginning of the commodities boom.

Being located in India, SLT enjoys a low cost of production making them quite competitive in the world commodities market. SLT enjoys a leading market share in India in all three of their primary business lines, Copper, Zinc and Aluminum production.

While zinc mines much of their own end product, they source the majority of their copper and aluminum requirements from third parties. Copper concentrate is purchased on the London Metals Exchange, alumina from third party suppliers.

78% of revenues are derived from sales in India and Asia combined.

Indian government - There appears to be some issues in the divestiture of the Indian government’s minority ownership in both SLT's aluminum operations and zinc operations. The Indian government currently owns 49% of SLT's aluminum operations and 30% of SLT's zinc operations. The issue with the zinc operations actually pertains to the government of India's original divestiture of 64% of the zinc operations to SLT earlier this decade. This one by a public interest group appears to have little chance of success. In 2004, SLT exercised an option to purchase the remaining 40% Indian government interest in SLT's aluminum operations. The Indian government has and still is disputing this exercise. As of 6/07 there has been no resolution. There is also another issue with SLT's optioning the 30% remaining Indian government interest in the zinc mines. This pertains to claims that SLT did not act in the best interest of India. This one has been dragging on for over 5 years, although there has been no further action by the Indian government since 2005. If down the line the Indian government again asserts these claims and were to eventually win the resulting legal case, the penalties for SLT are quite harsh. I've no idea what the chance of this happening may be, although it would appear this would not occur for 4-5 more years at least....and it appears the Indian government may have decided to drop this last one altogether. Also it appears SLT plans on ending this, by issuing a 'call right' in which SLT would overpay the Indian government for their remaining 30% interest in SLT's zinc operations. SLT is actually planning on using the ipo cash for this very purpose. I think the takeaway here overall is that government intervention is a definite risk here. At the least, SLT has extensive regulation and a not so silent partner in the Indian government. If for some reason the government of India shifts to a more anti-capitalist stance, operations such as SLT would indeed suffer. In other words, public shareholder would suffer.

Commodity risks -- stating the obvious, but should the strong commodity market of the past 5 years turn down, SLT would definitely be affected. With the continued strong growth in Asia and India, it would probably take a prolonged worldwide economic slump for this to occur.


SLT's fiscal year ends 3/31 annually. FY '07 ended 3/31/07.

$1.8 billion in cash post-ipo, $300 million in debt. SLT will most likely use the cash on hand to purchase the Indian government’s minority ownership of SLT's zinc operations. This is not a given however.

Dividends - SLT has paid dividends in the past and plans to in the future. Dividends are payable annually soon after the end of the fiscal year(3/31). FY '07's dividend was equal to $0.075 per share. On a pricing of $14, SLT would be yielding 1/2 of 1% annually.

2 1/2 X's book value on a pricing of $14.

Fueled by the strong commodity market in both demand and price, SLT doubled revenues in FY '06 and then again in FY '07.

FY '07(ending 3/31/07) - Revenues increased by 100% to $5.65 billion. Copper operations accounted for 47% of revenues, zinc operations 33% of revenues and aluminum operations 20% of revenues. Gross margins were a strong 40%. Operating margins were 38%. SLT's tax rate was 27%. Net margins after taxes were 28%. After removing minority interests (which will remain post-ipo also), net earnings were $1.61. On a $14 pricing, SLT would trade 9 x's trailing earnings. Interestingly, the bulk of SLT's net earnings are derived from their zinc operations. While the zinc operations accounted for 33% of revenues, they accounted for 60% of operating profits. Pretty easy to discern the reason: SLT mines the majority of their own zinc production, while they source the majority of their raw aluminum and copper. The cost of production for their zinc operations remains rather constant even with the underlying commodity price rise. Because SLT mines their own zinc they're able to benefit from any commodity price rise of zinc in their end selling price. While they're able to pass along the commodity costs of the procured aluminum and copper, their raw materials costs in these two segments rises with the underlying commodity price rise. The following fueled earnings for SLT: 'The daily average zinc cash settlement price on the LME increased from $1,614 per ton in fiscal 2006 to $3,581 per ton in fiscal 2007, an increase of 121.9%.' SLT's operating margins in their zinc business literally went through the roof in FY '07 to the tune of 73%!

FY '08(ending 3/31/08) - Copper and aluminum are low margin segments for SLT, as long as zinc prices remain robust, SLT will produce strong results. Through the first quarter of FY '08, zinc prices have remained quite strong. Results for FY '08 will also depend on SLT's ability to purchase the Indian government’s 30% remaining stake in SLT's zinc operations. If they're able to reclaim this stake, the bottom line should grow nicely the remainder of the fiscal year as few earnings in SLT's zinc operations will be funneled off to minority investors. SLT has increased capacity each of the past two years across their operating segments. I would anticipate a 5% -10% capacity increase in FY '08. Assuming a continued robust end market price/demand wise for copper, aluminum and (especially) zinc, I would expect to see SLT grow the top-line by 10%-15% in FY '08. This does not assume SLT is successful in buying that 30% zinc stake from the government. Bottom line could grow 20% due to very little relative GSA expense. Earnings per share on $6.4 billion in revenues would be $1.80 - $1.90. Note that these estimates assume rather flat commodity prices in 2007, no large gains or dips in aluminum, zinc and copper. Zinc is the one to watch here. If zinc prices fall, SLT's earnings will as well. If SLT earns $1.80 - $1.90, on a pricing of $14 it would trade 8 x's FY '08 earnings.

Power generation is sort of the wild card here. While SLT already operates seven power plants that supply power to their metal production facilities, they're planning construction of a general power plant. This plant will not be online until at least 2010.

The other wild card is SLT's ability post-offering to purchase the remaining 30% interest in their zinc operations from the Indian Government. If this transpires, and if the price of zinc remains strong, SLT's earnings will be substantially higher then projected.

Conclusion - SLT will be an institutional favorite on offering. There are a huge number of shares being offered here. Also there most likely will not be the usual 'ipo effect' as SLT is already trading in India. The result should be a rather muted opening here. This is a solid operation, printing money in this commodity bull run the past few years. If this were a straight ipo with fewer shares, this would be a 'must own' on the offering price of $14. I like this deal even with the large number of shares and that it is a secondary coming to the US market at all-time trading highs. Keep in mind the huge number of shares in this deal (125 million) and the run-up to all-time highs for Sterlite on the Indian exchange pre-US offering. Plus this deal is pretty substantially dilutive, adding 23% to SLT's worldwide market cap. I like this company and think the deal works over time. The external factors mentioned just prior, however, should really mute near-term performance. I would be very surprised if SLT appreciated substantially near-term. Over time, if the price of zinc remains strong, SLT will do quite well.

Also keep an eye on SLT's efforts to purchase the Indian government's 30% stake in SLT's zinc operations. If they're successful that could be a nice bottom line driver in a strong zinc pricing market. Recommend the deal, but with substantial near term deal related headwinds would not expect much appreciation here near term. Recommend as mid-term plus play in a strong zinc pricing environment.

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June 15, 2007, 7:40 am


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BAGL - Einstein Noah Restaurant Group

BAGL - Einstein Noah Restaurant Group plans to offer 5.8 million shares(assuming over-allotments) at a range of $19-$21. Morgan Stanley and Cowen are lead managing the deal, Piper Jaffray co-managing. Post-ipo BAGL will have 16.4 million shares outstanding for a market cap of $328 million on a pricing of $20. IPO proceeds will be used to repay debt.

Greenlight Capital(affiliated with recent ipo GLRE) will own 60% of BAGL post-ipo. Greenlight assumed 97% ownership in BAGL following BAGL's reorganization from bankruptcy in 2003. Greenlight was a corporate bond holder in BAGL prior to the bankruptcy and those debt notes were converted to a nearly full equity stake following reorganization. Greenlight is not selling any shares on ipo, although a chunk of ipo proceeds will be used to close out a debt note held by Greenlight.

BAGL's shares currently trade(pre-ipo) on the 'pink-sheets' under the symbol NWRG. Looking through NWRG's most recent earnings release, it appears this is a very 'clean' move from the pink sheets to the nasdaq on ipo. Company structure wise it will act as a secondary offering of 5.8 million shares, which will be used to clean the balance sheet up by paying down debt. Debt levels will go from $227 million pre-ipo to $138 million post-ipo, assuming a pricing of $20. NWRG's stock price has ranged from $17-$22 over the 30 days pre-ipo, with very few shares generally traded.

From the prospectus:

'We are the largest owner/operator, franchisor and licensor of bagel specialty restaurants in the United States. We have approximately 600 restaurants in 36 states and the District of Columbia under the Einstein Bros. Bagels, Noah’s New York Bagels and Manhattan Bagel brands.'

The Einstein brand is located in 33 states, Noah's in 3 states and Manhattan concentrated in the northeast US. As with most bagel spots, focus is on morning and into early afternoon. Offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels and breads, gourmet soups and salads, decadent desserts, premium coffees and an assortment of snacks.

Fast casual morning niche - Highly competitive segment in which BAGL operates. BAGL's largest component Einstein Bagels was created in 1995 by Boston Chicken. It appears much as Boston Chicken, Einstein expanded too quickly laying on debt to open new locations. This actually occurred pretty much across the board in the bagel segment as the bagel chains races to open new stores to grab the 'bagel' segment market share in attempts to be the 'bagel' Starbucks. Pretty much all of them ran into financial difficulty as debt servicing overcame sluggish revenues. Consolidation ensued, the debt holders took over the various companies and a few years later we get the BAGL ipo. Even with consolidation in the sector, competition is fierce. BAGL competes directly with other bagel chains such as Brueggers, as well as coffee chains such as Starbucks, Dunkin' Donuts and Caribou and other 'fast casual' morning stops such as Panera. In addition many fast food restaurants such as McDonalds are focusing more on premium coffee and offerings that are directed at taking market share from the coffee chains and fast casual breakfast spots such as BAGL. It is a tough niche. The history of the 'bagel wars' from the late '90's is a perfect example of why debt levels are always extremely important to keep an eye on. When operations lay on heftier and heftier debt to expand either through new locations or acquisitions, the bar to insolvency gets lower and lower. For those that are interested in a primer on the importance of debt should research the bagel 'boom' and the theater chain expansions of the late '90's.

60% of BAGL's revenues are derived during the 'breakfast' portion of the day. BAGL post-ipo will be the largest 'bagel' operator in the US. 10 consecutive quarters of positive same store sales. This should have an asterisk though as BAGL had negative same store sales for 2-3 years in a row prior to this pick-up, so the starting point here was low.

New stores - For the past 5 years BAGL has focused on getting their financial house in order. This has included closing under performing stores, reworking their entire in-store concept and managing the business(and each store) more efficiently. The result has been that BAGL has seen the number of stores decrease annually each of the past 5 years. As of 4/4/07, BAGL had 597 total locations, 410 of which were company owned, 100 licensed and 87 franchised. In 2007 however, BAGL plans to begin a moderate expansion of company owned stores by opening 10-15 new stores under the Einstein and Noah brands. BAGL also plans on much more aggressive licensing and growth. Licensed locations are located in airports, colleges and universities, hospitals, military bases and on turnpikes. BAGL opened 29 new licensed locations in 2006 and plans to open 30-40 new licensed locations in 2007. During BAGL's reorganization and aftermath, the franchising segment suffered greatly. BAGL has lost franchises annually each year this decade. They plan on growing this part of the business, however it appears much of the non-company owned growth is being directed towards the licensing concept.

Company owned restaurants account for 90%-95% of overall revenues.

Property - BAGL does not own any properties, they lease all restaurant space at company owned locations.


BAGL will have fairy significant debt post-ipo of $138 million.

Even with 10 straight quarters of same store sales growth, revenues have been sluggish this entire decade. As BAGL has operated more efficiently and grown same store sales the past 2 1/2 years, the impact in overall revenues has been nil due to store closings and loss of franchisees. Overall, looking at BAGL's revenues the past five years is akin to looking at a flat line with revenues 'stuck' from 2002-2006 at $374 million - $399 million.

2006 - $390 million in revenues, 20% gross margin. Indicative of improving store performance(and closing poorly performing locations), gross margins were highest in 4 years. Operating margins were 11%. Debt servicing costs(factoring in reduced debt servicing based on debt paid on ipo) ate up 40% of operating profits. Depreciation & amortization charges took away a bit more as well. Note that BAGL has approximately $150 million in tax loss carryforwards from pre/post bankruptcy days. Even though they're capped on how much they can utilize in a given year, BAGL won't be paying taxes on any earnings for the foreseeable future. So we'll give a 'no tax' number here for net and then a 'tax plugged in' number so that BAGL can be compared apples to apples with the sector. 'No tax' net margins for 2006 were 3%, fully taxed would have been 2%. Earnings per share not taxed were $0.80, plugging in taxes they would have been $0.50.

2007 - Much as rest of decade previous, first quarter 2007 revenues were flat compared to first quarter 2006. Same store sales increased 1%. BAGL had 21 fewer restaurants in the first quarter of 2007 as compared to first quarter 2006. It would appear BAGL is about completed shuttering non-performing stores(only 20 more anticipated closing next three years as leases expire) and is about to embark on company owned store expansion. The plan is for controlled growth, so I would expect the number of overall company stores to grow all that much in 2007 overall. I would expect overall revenues to be in the $390-$400 million ballpark for 2007. Gross and operating margins should be similar to 2006. BAGL will benefit in 2007 from decreased amortization & depreciation costs which will assist to boost the net margins and bottom line. Net margins('no tax') should improve to 3 1/2%, taxed to 2 1/2%. Official untaxed earnings should be in the $0.85-$0.90 range. Plugging in taxes, earnings would be $0.55-$0.60.

Conclusion - Coming out of bankruptcy reorganization, management the past 3 years has done a nice job improving margins and same store sales comparables. Keep in mind much of this same store sales growth is attributable to sluggish performance in 2003/2004 as well as management simply closing non-performing stores. BAGL has extensive tax carry-forwards, meaning the bottom line here is greatly benefiting from not being taxed. Plugging in taxes, BAGL looks awfully pricey in range, especially keeping in mind past bankruptcy(for Einstein and Noah) and the not insignificant debt being carried on the books. Revenues have been stagnant, competition is fierce. BAGL to me looks to be a turn-around story at least fully valued in range.

June 1, 2007, 12:44 pm


pre-ipo analysis pieces available to subscribers at http://www.tradingipos.com

RRR - RSC Equipment Rental

RRR - RSC Equipment Rental plans on offering 24 million shares(assuming over-allotments) at a range of $23-$25. Note that 11.5 million shares in this deal are being offered by insiders. Deutsche Bank, Lehman and Moran Stanley are lead managing the deal, five firms co-managing. Post-ipo RRR will have 103.1 million shares outstanding for a market cap of $2.47 billion on a $24 pricing. IPO proceeds will be used to repay debt as well as $25 million going to terminate a 'monitoring' fee. This $25 million is heading into insiders pockets.

Ripplewood and Oak Hill will each own approximately 32% of RRR post-ipo. combined they'll own 64% of RRR. Recently RRR recapitalized their operation resulting in the Ripplewood and Oak Hill majority ownership. As is the norm these days with this these sort of deals, Ripplewood and Oak Hill funded their recap investment primarily by laying on substantial debt to the back of RRR. RRR operates in a business in which they will have debt on the books as it is. They finance equipment purchases and then enter into leasing agreements with customers for said equipment. However the recapitalization more then doubles RRR's debt on the books, and did so without generating any future revenues as RRR's business related debt would. Even by paying off debt on ipo, RRR will have $2.7 billion in debt on the books post-ipo. This is simply too much for my tastes, especially with RRR's type of operation. By laying more debt onto RRR, Ripplewood and Oak Hill slow RRR's ability post-ipo to grow via laying on debt to finance greater number of equipment to then lease. RRR is a large established successful operation. However the balance sheet here stands in direct contrast to the recent ACM ipo whose balance sheet post-ipo is pristine. Different businesses yes, but all in all I'll go with a cleaner balance sheet ipo every time. Not only will the 'un-natural' debt laid on in the recap potentially slow growth, this substantial debt level will also eat into operating profits. As usual, I dislike seeing third parties come in and finance company purchases(or majority ownerships) via laying debt onto the back of a solid cash flow generating operation. It really handicaps the newer public shareholders post-ipo. Oak Hill, Ripplewood and minority owner ACF are the selling shareholders in this deal. ACF was the owner that sold a % in the recap to Ripplewood and Oak Hill. These two private equity firms will do quite well on this deal with the ipo cash-out as well as shares held post-ipo. We've seen this sort of thing a number of times previously.

Contingent 'earn-out' notes - In addition to the debt outstanding, there is the potential for more due to something called a contingent 'earn out' notes deal. If RRR has combined EBITDA of $1.54 billion or better for the fiscal years 2006 and 2007 combines, RRR will owe the pre-ipo shareholders(primarily Oak Hill, Ripplewood and ACF), a $150+ million bonus. If EBITDA is $800+ million in FY '08 then an additional $250+ million bonus is due. these bonuses would mature beginning in a decade or so and would go on the books I believe as new debt until then. There are a number of exceptions to this payout delay that would kick in principal payment earlier. It would appear RRR has a 50/50 or so chance at hitting the $1.54 combined 2006/2007 EBITDA number which would kick in the 'earn out' notes deal.

From the prospectus:

'We are one of the largest equipment rental providers in North America. As of March 31, 2007, we operate through a network of 459 rental locations across 10 regions in 39 U.S. states and four Canadian provinces.'

RRR believes they're the #1 or #2 equipment rental provider in the majority of regions in which they operate. Customers are primarily non-residential construction and industrial markets. Equipment ranges from large equipment such as backhoes, forklifts, air compressors, scissor lifts, booms and skid-steer loaders to smaller items such as pumps, generators, welders and electric hand tools.

85% of revenues are derived from equipment rentals, 15% from sales of used equipment. Average fleet age is 25 months, which RRR believes is one of the youngest in the industry. Original equipment cost of the fleet was $2.5 billion. RRR has invested $2.2 billion in their fleet over the past four years.

Fleet utilization was 70% over the 15 months concluding 3/31/07. Over the period, RRR has had over 470,000 customers with the top 10 customers representing 7% of overall revenues.

Business has been strong the past 4 years as RRR has achieved 15 consecutive quarters of positive 'same store sales' growth. This would mesh with the strong nature of the of non-residential real estate construction sector since 2003. The equipment rental market was $34.8 billion business in 2006 and is expected to grow 8%-9% overall in 2007. The top 10 companies in the sector accounted for 30% of overall revenues in 2006. Interestingly while this is a fairly fragmented sector, RRR has grown exclusively organically and not via acquisitions.

Competition - National competitors include United Rentals, Hertz Equipment Rental Corporation and Sunbelt Rentals. Regional competitors are Neff Rental, Ahern Rentals,. and Sunstate Equipment Co. A number of individual Caterpillar dealers also participate in the equipment rental market in the United States and Canada.


Substantial debt of $2.7 billion post-ipo is the issue here. The nature of RRR's business is going to mean there will be debt on the books. Prior to the recapitalization however, RRR was doing a very nice job of maintaining level debt levels of $1.2 billion in 2004, 2005 and into 2006 while expanding their equipment fleet. They were adding a lot of new equipment through cash flows while keeping debt levels stable. Sign of a strong business and solid management. My issue here(and it is a big one) is that the substantial additional debt added recently due to the recapitalization did nothing to help grow the business. All it did was help the private equity interests make money.

As RRR states, 'Our revenues and operating results are driven in large part by activities in the non-residential construction and industrial markets. These markets are cyclical with activity levels that tend to increase in line with growth in gross domestic product and decline during times of economic weakness.'

Debt servicing costs will now eat up roughly 50% of RRR's operating profits post-ipo. While business is strong currently RRR will still have nice cash flows even at these debt levels. However their business is highly dependent on overall non-residential construction. We saw this segment of the economy slow substantially in 2001-2002. While a similar future slowdown most likely would not mean difficulty in servicing their debt, it could easily mean servicing debt wipes away cash flows and bottom line net profits. My issue here is not RRR's debt as they're going to have debt in their line of business. My issue is the substantial debt laid on during the recap that does nothing to assist the business. The newer debt is debt that is dragging the business, not debt in which they're making a profit by leasing equipment financed. Big difference. THE difference maker for me when it comes to this RRR ipo.

Business has been strong: Same store sales increases were 12% in 2004, 18% in 2005, 19% in 2006 and 13% the first quarter of 2007. Keep in mind this sector is not apples to apples comparison to retail and restaurant same store sales growth. While the latter two tend to have a finite selling space, RRR is able to add equipment and overall rental capacity annually much easier in a strong demand environment. This is not really a 'finite selling space' type business. Still the same store sales do indicate an overall healthy operating climate for RRR the past few years.

Note that 2006/2007 numbers include a look at the company as if both the recapitalization and the ipo had closed 12/31/05. In other words a look at operations as the company will be structured post-ipo.

2006 - Revenues were strong at $1.65 billion, a 14% increase over 2005. Reasons for the increase were additional rental equipment added as well as higher purchase and rental rates on equipment. Gross margins are rather strong here at 36%. RRR is in many ways a 'middle man' type operation. These are impressive margins for this type of business. Operating expenses were 11% of revenues. RRR has held operating expenses in this 10%-11% range over the years. Operating margins were 26%. Pre-recapitalization, net margins would have been 12% with earnings per share of nearly $2. Without the recap debt, RRR would be dirt cheap in range and strong recommend. However that isn't the case. Including the recap debt, 2006 net margins were 7% with earnings per share of $1.17. Huge difference, all into the pockets of the Oak Hill and Ripplewood.

2007 - RRR had a solid first quarter, even though equipment sales were down a bit. It appears in 2006 RRR cleared out a lot of old equipment via sales and replaced rental fleet with newer stuff. Overall revenues look as if they may grow by 10% in '07 to $1.82 billion. Gross margins should again be in the 36% range. As RRR as managed operating expenses to that 10%-11% area for years now, I would expect similar in 2007 meaning operating margins should again come in around that 25%-26% number. Debt servicing will 'eat' up approximately 50% of all operating profits in 2007. Again a chunk of this debt is recap related and not debt RRR will be making money off of through equipment purchases and then renting out said equipment. Net margins should be 7 1/2% - 8%. Earnings per share should be in the $1.30 range. On a pricing of $24, RRR would trade 18 x's '07 earnings.

RRR's closest public comparable is United Rentals(URI). A quick look at each.

URI - $2.83 billion market cap, currently trades 0.72 X's '07 revenues and 13 X's 07 earnings estimates. URI is heavily leveraged with $2.7 billion in debt. Revenue growth estimates are in the 5%-7% range.

RRR - $2.47 billion market cap on a $24 pricing. Would trade 1.4 X's '07 revenues and 18 x's '07 earnings estimates. RRR is heavily leveraged post-ipo with $2.7 billion in debt. Revenue growth estimates for '07 in the 10% ballpark.

Conclusion - If not for the recap debt laid onto RRR, this would be an easy recommend. As it is, the multiple here seems a bit steep in relation to both URI and the amount of debt on the books post-ipo. RRR is a solid company that has booked strong cash flows and earnings the past four years. This is a good company that appears to have managed growth very well. However I can't recommend this deal, due to the debt laid on here to directly benefit Ripplewood and Oak Hill(and not the company and public shareholders). In solid economic climate, I would expect RRR operationally to continue to do well. Neutral overall here on this deal. Strong business and sector leadership with a private equity related drag on the bottom line.

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