Beyond the DJs takeover: Our next 7 targets

Australia’s takeovers scene is heating up … prepare for more action.

Summary: Following the surprise takeover bid for David Jones, seven well-known stocks stand out as takeover targets.
Key take-out: The combination of low financing costs, muted economic growth and a deregulated market has created the perfect conditions for a period of takeover action in Australia.
Key beneficiaries: General investors. Category: Mergers & acquisitions.

The much-anticipated ‘rush’ of takeover activity we have been expecting for some time may be soon upon us.

This week’s dramatic $2.1 billion bid for David Jones from South Africa’s Woolworths group follows hard on the heels of the spectacular takeover battle we saw earlier this year for Warrnambool Cheese & Butter (WCB).

For retail investors the David Jones bid further underpins the prospects for a range of stocks which have already been ‘in the loop’ of recent takeover activity. I estimate there are seven stand-out situations in the market at the moment (which I’ll deal with shortly).

But first, to deal with David Jones and Myer: The Myer group is now left out in the cold with an unclear future, and without any obvious future bidder it may struggle. It’s also unlikely that Myer can deal itself back into the David Jones bid because the $4 price offered by Woolworths– and agreed by David Jones – is simply too high.

For Myer shareholders there is at least the residual benefit that action in its sector pumps up the share price in the same way rival dairy stocks surged in the shadow of the Saputo bid for WCB. Myer finished the day 3.9% higher at $2.39.

The Woolworths group (no relation to Woolworths in Australia) is offering a handsome 27% premium to the three-month weighted average price of David Jones – and a serious 40% premium to the price of David Jones in the period prior to the ambitious Myer and David Jones merger proposal. (Myer has now formally removed the merger proposal).

At $4 a share the Woolworths bid offers a healthy price for a department store group which is facing many challenges from the likes of H&M, Zara, Top Shop and many online alternatives. After an earlier 25% spike, DJs finished 22.6% higher today at $3.91.

Looking ahead to a post-David Jones takeover landscape I see seven stocks that are very well positioned to benefit from takeover action in the months ahead. Here they are:

1. GrainCorp – Although the Federal Government knocked back the bid by US firm Archer Daniels Midland (ADM) last year, it did give the predator permission to lift its stake in GrainCorp from 19.9% to 24.9%. Since then, ADM has confirmed it will attempt to buy more shares in the target company. As a result, GrainCorp remains firmly in play over the medium term, although any future bid by ADM will probably have to involve a joint venture with a local partner to get around Foreign Investment Review Board (FIRB) concerns.

GrainCorp

2013-14

2014-15

Earnings/share (adj)

47.3c

61.1c

Dividend/share

30c

36.1c

EPS growth (adj)

-38.34%

29.17%

DPS growth

-24.92%

20.13%

Price/Earnings (adj)

18.50 times

14.32 times

Dividend Yield

3.43%

4.13%

Source: Bloomberg

2. Bega – Despite the fact I’ve written about this stock before, it’s worth reiterating that the demand for dairy produce out of Asia continues to grow. Australia (and New Zealand) are in prime position to take advantage of this dietary change by our neighbours to the north, and investors should take note. There aren’t many smaller, listed targets left since WCB was snapped up last year, so NSW’s Bega remains firmly in the crosshairs. (Also see Milked dry).

Bega Cheese

2013-14

2014-15

Earnings/share (adj)

21.4c

24.2c

Dividend/share

8.7c

10.3c

EPS growth (adj)

24.51%

13.07%

DPS growth

15.78%

18.43%

Price/Earnings (adj)

24.30 times

21.49 times

Dividend Yield

1.67%

1.98%

Source: Bloomberg

3. iinet – Although this telco company’s visionary founder, Michael Malone, recently stood down as both CEO and director of iinet, the business has not lost any of its strategic appeal. In fact, a takeover of it is now more likely, as Mr Malone’s 5.6% holding can now be considered for sale. When company founders leave the business they began, they are much more likely to be open to offers for their shares. In addition, one of my important rules about investing in takeover targets is that you have to be happy to own the business in the absence of any bid – and iinet certainly fits this criteria.

iiNet

2013-14

2014-15

Earnings/share (adj)

41.3c

48c

Dividend/share

22.1c

26.1c

EPS growth (adj)

9.26%

16.21%

DPS growth

16.27%

18.24%

Price/Earnings (adj)

17.31 times

14.90 times

Dividend Yield

3.09%

3.65%

Source: Bloomberg

4. Treasury Wines – Over the past couple of years Treasury has had a shocking run with overstocked wine and subsequent profit downgrades. Nevertheless, its central business case that consumers in both Asia and the USA will eventually drink as much wine as Europeans (and Australians) do is a good one. Because Treasury is yet to prove it can make a consistent profit selling fermented grape juice, I regard it as a speculative investment right now. But once it gets its house in order, its strong brand portfolio means the Pernod Ricards of this world will soon come knocking. (See Treasury Wine CEO wants to lift US operations).

Treasury Wines

2013-14

2014-15

Earnings/share (adj)

19.6c

23c

Dividend/share

12.6c

13.5c

EPS growth (adj)

-7.13%

17.48%

DPS growth

-3.41%

7.13%

Price/Earnings (adj)

19.92 times

16.98 times

Dividend Yield

3.32%

3.46%

Source: Bloomberg

5. Nib Holdings – Because the Australian government has decided to sell Medibank Private, attention must now turn to other listed health insurers. Medibank is the giant of the local market, with a share of around 30%. For other large players like Bupa (which bought HBA a while back) to compete, they need to get big. As a result, smaller players like Nib are likely to become targets. The main risk with any investment in this space is that the Government can change the rules surrounding health insurance at any time – yet it is also in the Government’s long-term interests to keep as many people privately insured as possible. Hence, Nib is now a target. (See Alan Kohler’s recent video interview.)

NIB Holdings

2013-14

2014-15

Earnings/share (adj)

          16.1c

17.4c

Dividend/share

11c

12.7c

EPS growth (adj)

            5.20%

7.91%

DPS growth

10.24%

14.77%

Price/Earnings (adj)

17.70 times

16.38 times

Dividend Yield

3.86%

4.46%

Source: Bloomberg

6. icar Asia – This business is not much more than a start-up in the Asian car classifieds industry, and is yet to make a profit. It does, however, have as its major shareholder the ultra-successful Carsales.com.au, with whom it shares both technology and expertise. Carsales will almost certainly buy the 77% of icar Asia it doesn’t currently own, and in the meantime the stock is a good (albeit risky) means of playing continued growth in Asian auto sales.

7. Australand – A strong indicator of future takeover activity is the presence on a target company’s share register of a strategic competitor. Recently the 40% owner of property group Australand, Singapore’s Capitaland, sold its stake in the target company. Normally this would be bad news for the prospects of a bid, but in this case half of Capitaland’s shareholding was snapped up by the acquisitive Stockland Group. Stockland has yet to make clear its intentions towards Australand, but it seems most unlikely that it has purchased the stake for inclusion in the staff super fund. The main negative with Australand right now is that its share price has shot up well above its stated net asset value (NAV) of $3.56 per unit (as at 30 June 2013). It’s rarely a good idea to buy property trusts too far above their NAV, so I’m waiting for the heat in this situation to cool off a little.

Australand

2013-14

2014-15

Earnings/share (adj)

29.2c

30.6c

Dividend/share

24.7c

25.7c

EPS growth (adj)

7.64%

5.04%

DPS growth

14.68%

4.26%

Price/Earnings (adj)

14.76 times

14.08 times

Dividend Yield

5.73%

5.96%

Source: Bloomberg

To conclude: I’ve been saying for months the combination of low financing costs, muted economic growth and a deregulated market has created the perfect conditions for a period of takeover action in Australia … it looks like it’s started and the next targets are there for all to see.


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