NEW YORK (

TheStreet

) --

J.Crew's

(JCG)

nearly $3 billion bid from a private equity consortium is causing a frenzy among investors who are searching for the next retail takeover.

TPG and Leonard Green said they will pay $43.50 a share for J.Crew, which represents a 16% premium on its stock price at the close on Monday. This deal also marks the second significant buyout within the sector over the past two months, following Bain's $1.8 billion acquisition of

Gymboree

(GYMB)

.

While valuations have risen over the past several months, as it became clearer that consumer spending was not headed for a double-dip, the retail space, specifically specialty stores, remains cheap, says Needham analyst Christine Chen.

J.Crew Gets PE Bid, Who's Next?

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The two deals are expected to put a significant number of companies into play.

So what exactly is private equity looking for in an M&A candidate? If J.Crew and Gymboree, are any indication, they are not vying for fixer-uppers.

"Private equity wants strong players with a finished product," Wall Street Strategies analyst Brian Sozzi, says.

Firms are also looking for clean balance sheets and attractive earnings leverage, but aren't necessarily looking for bargain bin prices. The real focus (and the deals most likely to see follow through), aside for one or two names also seems to be contained to the specialty retail space.

Nomura Securities International analyst Paul Lejuez says he likes companies that act their age, and have international opportunity, flexibility and pricing power. "We believe the four characteristics that are attractive to us should also be attractive to private equity," he wrote in a note.

Lejuez notes that "turnaround potential" is not one of the characteristic either he, or private equity, are looking for in determining an attractive retailer.

High return on investment capital, as well as discounted cash flow valuation that make sense, are also important, according to Lejuez, who matched up these characteristics to provide a framework for other potential targets

(see table below)

.

Based on his model,

Abercrombie & Fitch

(ANF) - Get Report

is one of the standouts. The teen retailer is a premium name that may be attractive to private equity.

Over the past several months Abercrombie & Fitch has seen its domestic business slowly recover. While its store base may be saturated in the U.S., the company has substantial opportunities overseas, with international growth at the forefront of its initiatives.

J.Crew going private allows the company to grow its Madewell and Crewcuts concepts out of the harsh gaze of investors, who in the short-term, have predominantly ignored the long-term benefits of the chains. Similarly, Abercrombie & Fitch, if taken private, would be able to aggressively close stores, more than it probably would as a public company, without igniting fear on Wall Street. Closing 300 stores (which analysts say is much needed) would result in a charge to earnings, which would just raise a red flag among investors in a public forum.

Elsewhere,

Urban Outfitters

(URBN) - Get Report

is one of the few growth stories left in the retail sector.

Aside from its namesake stores, Urban Outfitters has growth opportunity at its other concepts, Anthropologie and Free People. The specialty retailer has also been aggressively buying back its stock.

Still, with a market cap of $6 billion and a significant focus in fashion, it makes a deal less likely.

Children's Place

(PLCE) - Get Report

received a letter from Galt Investment Partner saying that while it's pleased with the overall performance of the company, it is concerned that the board is missing "significant opportunities to generate shareholder value, including through a value-maximizing business combination transaction."

Galt suggested a potential merger with Gymboree,

Carter's

(CRI) - Get Report

, or seeking private equity dollars.

Takeover chatter surfaced for

American Eagle Outfitters

(AEO) - Get Report

about two months ago. While speculation has since waned, the teen retailer has seen a stark improvement in its business.

Rival

Aeropostale

(ARO)

, is also a possibility, as its newer P.S. kids concept provides another vehicle for growth, while athletic footwear retailers

Finish Line

(FINL)

and

Foot Locker

(FL) - Get Report

have also been named as potential LBO targets, as well as retail giant

Gap

(GPS) - Get Report

.

Outside of specialty retailers, department stores

J.C. Penney

(JCP) - Get Report

,

Macy's

(M) - Get Report

and

Saks

(SKS)

have been rumored to be acquisition targets.

BJ's Wholesale

(BJ) - Get Report

, one of the more probable deals, fits a similar description to the specialty stores. "BJ's is effectively a grocer and that is a very stable concept as well, no debt and $50 million of cash on balance sheet," says Michael O'Hara, CEO and Managing Member of Consensus Advisors.

Of course, only a handful of these deals (if that) will actually get done in 2011. The key takeaway is what the chatter is doing to the stocks.

"The floor for retail stocks may be rising," says Phoenix Equities analyst Robert Samuels, "as investors now keep it in the back of their minds that any one of these stocks could be poised for a takeover."

--Written by Jeanine Poggi in New York.

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