Bank on it! Our next takeover target

After picking Warrnambool Butter in advance of the current bidding war, here’s our next takeover target …and it’s in financial services.

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Summary: The mergers and acquisitions zone is become more active once again, with several deals unfolding since our last list of potential takeover targets was published on September 11.
Key take-out: Commonwealth Bank of Australia has bought a key stake in listed mortgage broker Mortgage Choice, and a full takeover bid could be on the cards in the medium term.
Key beneficiaries: General investors. Category: Shares.

First to recap: In recent times I have offered two lists of 10 top takeover targets to Eureka Report subscribers – the first on August 14 and the second on September 11 (see Our top 10 takeover targets and 10 stocks in the takeover spotlight). If you want to familiarise yourself with the list, read below. Today I add one more name to the list … but first, read on.

August 14

Envestra (ENV)

IOOF Holdings (IFL)

Santos (STO)

Woodside (WPL)

Caltex (CTX)

Transurban (TCL)

iinet (IIN)

Coca-Cola Amatil (CCL)

Treasury Wine Estates (TWE)

Tabcorp Holdings (TAH)

September 11

Trust Co (TRU)


GrainCorp (GNC)

Seek (SEK)

Clough (CLO)

Australand (ALZ)

Warnambool Cheese & Butter (WCB)

M2 Telecommunications (MTU)

Insurance Australia Group (IAG)

Qube Holdings (QUB)

In the wake of Eureka Report’s publishing of these two lists a fair bit of positive share price activity has occurred.

First, Qube Holdings has rallied considerably due to having won new contracts, and thus I have reduced (but not completely sold) my holding in it.

Second, Federal Treasurer Joe Hockey has delayed his decision on Archer Daniels Midland’s bid for GrainCorp. I hope there is nothing too sinister in this, but GNC’s share price has declined a little since last I wrote about it.

And third, and most importantly, Warnambool Cheese & Butter has received not one but two takeover offers! As I explain to James Kirby in the video below, NSW-based Bega Cheese lobbed a cash-and-scrip bid worth around $6.40 per share just a day after my recommendation on September 11.

Then, just last week, Canadian dairy giant Saputo trumped Bega with a $7 per share all cash offer that also has the potential to provide eligible shareholders with up to 56 cents per share in franking credits.

While there is a fair chance Bega will attempt to put more money on the table, it probably lacks the financial capacity of Saputo. This, combined with a new Federal Treasurer still trying to decide what he thinks about foreign investment here, suggests that investors might consider taking some profits off the table in WCB – which has proved to be a very good trade in a short space of time.

So what to do with the excess cash liberated by QUB and WCB?

My newest takeover target is listed mortgage broker Mortgage Choice (MOC).

Because the “Big Four” banks are restricted from buying each other due to the Four Pillars policy, they’re looking at other ways of increasing share in the competitive home loan market.

Earlier this year, Australia’s biggest bank, the Commonwealth (CBA), increased its stake in John Symonds’ Aussie Home Loans (an unlisted company) to over 80%. Since then, CBA has acquired a stake of 22% in MOC, and it seems to me that eventually CBA will look to increase this shareholding too. There are two main ways for CBA to do this: (a) via the ‘creep’ provisions in the Corporations Act, which allow the bank to lifts its shareholding by up to 3% every six months; or (b) via a full takeover offer for all the MOC shares it doesn’t currently own.

I feel that the latter option will prove too tempting for CBA to ignore at same stage in the next one-to-two years.

As luck would have it, the macro environment for home loan providers and brokers is pretty good right now. Interest rates are hovering near record lows, clearance rates are on the up and house prices appear in some parts of the country (e.g. Sydney) to be breaching the record highs last seen in early 2010.

Given all this, the outlook for MOC as a standalone investment looks a solid, albeit mildly expensive prospect. Throw in the prospect of CBA upping the ante, however, and MOC is well deserving of a place in our Takeover target list.

Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.

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