Bettor's Guide to Buyouts

Private equity's buy side is designed to make the rich richer, and its asset requirements keep most people out. But you can still make money from the game if you can figure out which company is going to be taken out before it happens. For starters, check out the retail sector.

Buyers view retailing as easy to understand, laden with stable cash flows and ripe for consolidation. The rise of Wal-Mart(WMT Quote) has left old-line retailers with too many stores and bloated cost structures. Many investors see untapped value in their real estate portfolios.

What follows is an odds sheet on possible 2006 buyouts compiled from discussions with experts from across the stock market.

Even Money

Saks (SKS Quote) Market cap: $2.4 billion.

Saks alleviated some of the buyout speculation surrounding its shares by selling off its Northern department store group for $1.1 billion, freeing itself from the baggage of an ill-fated 1998 merger. Nevertheless, a big portion of its investor base still distrusts the people running the company and would jump at a chance to have them replaced. Meanwhile, Saks' luxury chain, Saks Fifth Avenue, is a jewel whose value could be unlocked in the hands of a buyout firm.

"In a period of explosion in the luxury field, Saks is underperforming," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consultancy. "Saks is a prime candidate for a buyout."

2-to-1 Odds

Dillards (DDS Quote) Market cap: $2 billion.

Tom O'Neill, CEO of the private equity shop Exodus Capital Advisors, points to Dillards, the regional department store chain, as a company with real estate assets that make private investors' mouths water.

"There are a number of retail companies in which the value of their real estate portfolio has dramatically increased in recent years, and that hasn't been reflected in their market cap," said O'Neill.