Our top 10 takeover targets

The conditions are arguably ideal for takeover activity this year – yet 2013 has been a little slower than some might have expected to date.

But there are good reasons to think this state of affairs should change pretty soon.

For a start, interest is cheap and debt relatively plentiful, meaning that potential buyers can raise affordable funds if they so desire. In addition, the slowing of the local economy means that organic growth might soon be hard to come by – so growth by acquisition could appear very attractive.  And finally, in four weeks’ time the federal election will be over, meaning that uncertainty from the fear of ‘sovereign risk’ should dissipate.

Certainly the overseas evidence is pretty compelling that M&A (merger and acquisition) activity is beginning to accelerate. There have been a string of takeover attempts on leading companies such as telecom Sprint , food giant Heinz and the computer maker Dell. Separately, there has been a burst of activity in the telecom sector around the world: In the US, telecom leader AT&T has bid for Leap Wireless. Meanwhile, Softbank recently acquired Sprint, and Vodafone outbid Liberty Global for Germany’s largest cable TV company Kabel Deutschland.  

So in which stocks should one invest to take advantage of any upswing in M&A? Here, in no particular order, is my top 10. As all are solid businesses in their own right, even in the absence of takeovers they can form strong holdings in any equity portfolio.

Envestra (ENV) – Almost two months ago, Envestra received an unsolicited (i.e. hostile) scrip merger proposal from its 33% shareholder, Australian Pipeline Trust (APA). This proposal offered ENV shareholders approximately $1.10 of APA scrip plus a 3c dividend. ENV has rejected the initial bid as inadequate, yet its 33% shareholding means that APA isn’t going away. I think ENV shareholders will ultimately receive another 10-15c from APA on top of the current share price of $1.12.

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IOOF Holdings (IFL) – Every decade or so the big banks decide to try and offer their customers a larger range of financial services. During the ’80s and ’90s, stockbroking and insurance products were all the rage. In the present day, the rise of self-managed super funds means that fund managers could soon be back on the radar. On the listed front I’ve looked at both Perpetual (PPT) and IFL, and feel that the latter is still a better bet than the former. While all fund managers are leveraged to the health of the sharemarket, IFL has a strong suite of products and manages money for a large variety of customers.

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Santos (STO) and Woodside Petroleum (WPL) – I’ve included two oil and gas giants here, albeit for different reasons. Santos’s big growth prospect is its coal seam gas to liquefied natural gas (i.e. CSG to LNG) in Gladstone, Queensland. Unfortunately it is competing for customers, workers and infrastructure in the same location with both Origin (ORG) and British Gas (BG). At some stage these three projects will become two or even one, quite possibly via a merger.

In WPL’s case, its takeover appeal comes from the fact that former suitor Shell Petroleum still has a 24% stake in the company, which it’s willing to offload – for the right price. Despite its relatively high cost structure (a problem shared by many local resource companies), WPL has enormous appeal to a variety of Asia-focused energy giants.

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Caltex (CTX) – for decades CTX has been little more than a local fuel refiner 50% owned by Chevron Texaco. Recently, however, CTX has indicated its desire to get out of refining and instead import fuel for distribution to its many hundreds of service stations, which should in fact be seen as mini supermarkets with petrol pumps out the front. Given how hungry for market share both Coles (WES) and Woolworths (WOW) are, it’s not a great leap to think that one of these basic needs retailing giants will soon come knocking at CTX’s door – the ACCC willing, of course.

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Transurban (TCL) – TCL is exactly the type of long-life monopoly stock that a number of large Canadian pension funds find attractive. Indeed, one of them made an unsuccessful bid for the company several years ago. TCL has an excellent domestic portfolio of roads, and has largely written down its problematic exposures offshore. It won’t stay independent for too long, especially in an environment of extended low interest rates (which make strong cash flow generators attractive).

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iiNet (IIN) – While there is some nervousness about the future of the National Broadband Network (NBN) should the Coalition win the upcoming election, such fear is unwarranted. Shadow Communications Minister Malcolm Turnbull is a big fan of fast broadband, and once built, either version of the NBN will allow second and third tier telcos to compete on a relatively even footing with giants like Telstra and Optus. Soon there will be a land grab for customers, and both IIN and Macquarie Telecommunications could well become prey.

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Coca-Cola Amatil (CCL) and Treasury Wine Estates (TWE) – I like both these drinks companies for similar reasons: they possess portfolios of strong brands, have a high proportion of offshore earnings in the era of a weaker Australian dollar and are well positioned to benefit from the increasing Westernisation of tastes in rapidly growing economies like Indonesia, Malaysia and China. TWE does have some issues in the competitive United States wine market, but its real future, like that of CCL, lies in Asia.

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Tabcorp Holdings (TAH) – a few days ago, British bookmaker William Hill announced it had purchased online betting company Tomwaterhouse.com for a sum of up to $110 million. At the time, William Hill’s CEO remarked that: “Believe me, if I could get my hands on that business (Tabcorp) I would shake it up and it would not be underperforming the way it is...”. History tells us that when monopolistic businesses are poorly run for extended periods of time, someone else often tries to buy them in an effort to extract greater profits. Tabcorp could well be the next local gambling company to be bought by offshore interests, albeit such a purchase would require the approval of various state gaming regulators.

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See Collected Wisdom for our weekly Takeover Action table.

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