Six hot takeover targets

The sharemarket is ripe for another bout of takeover activity.

Summary: The mergers and acquisitions space is becoming increasingly active, and conditions are ripe for more takeover action. Improved economic conditions, low borrowing costs, and a low Australian dollar, make many of our companies attractive morsels for offshore buyers. And to take advantage of the conditions, Australian companies will also be on the prowl for growth opportunities.
Key take-out: Takeover activity is no sector specific. Our list of potential targets below covers a wide range of industries, from agriculture to mining and energy, telecommunications, travel, transport, infrastructure, and financial services.
Key beneficiaries: General shareholders. Category: Mergers and acquisitions.

Until recently the takeover world had been quiet for the best part of two years. This I attribute to continued nervousness about both the US and European economies, combined with a general aversion to debt and, in Australia, a moribund stockmarket.

Since June this year, however, a lot has changed. Sharemarkets in America have rallied to record all-time highs, while local equities have hit a five-year peak.

Global interest rates remain at or near record lows meaning that, for the foreseeable future, debt remains cheap. And finally, organic earnings growth is proving increasingly hard for companies to achieve, meaning that expansion-focused CEOs are looking towards their competitors with avaricious eyes.

These factors combined mean that the sharemarket is ripe for another bout of takeover activity which, if the frenzied bidding for Warrnambool Cheese & Butter (WCB) is anything to go by, has already begun.

Warrnambool Cheese & Butter (WCB) – bid underway

The three-way bidding war for WCB is nearly at an end. Bega has declared its cash-and-scrip offer final, Murray Goulburn has probably run out of financial firepower with its $9 per share cash offer, and Saputo has just placed $9.20 on the table – if it gets to 50.1% ownership.

Unfortunately, for WCB shareholders, it seems that in the interests of Saputo getting a deal done quickly, the 56 cents per share of franking credits previously on offer as part of a special dividend are no longer available. I think that the price for WCB is now so rich that those with the shallowest pockets – Bega and Murray Goulburn – will soon accept Saputo’s offer and take the cash on offer.

As a result, WCB is probably a sell at prices much above $9.20.

Warrnambool

2013-14

2014-15

Earnings/share (adj)

37.4c

38.9c

Dividend/share

16.5c

17.4c

EPS growth (adj)

175.24%

3.97%

DPS growth

49.75%

5.75%

Price/Earnings (adj)

24.73 times

23.78 times

Dividend Yield

1.78%

1.88%

Source: Bloomberg

1. Bega (BGA)

One thing the bidding war for WCB has achieved is to highlight the latent value in Australian agricultural stocks. Bega has been a beneficiary of this, with its share price rising from just over $3 to over $4.70 over the past three months.

Assuming BGA accepts Saputo’s $9.20 per share offer for its 18% stake WCB, it’ll have a handy pile of cash sitting on its balance sheet. This alone should make Bega a takeover target if WCB does become a subsidiary of Saputo.

Having said this, when the takeover excitement over WCB quietens down, it wouldn’t surprise me to see BGA’s share price take a breather, notwithstanding the fact that New Zealand dairy giant Fonterra recently acquired a 10% stake. I’d look to buy BGA as a medium-term takeover target once its shares decline back closer to the $4 mark.

Bega Cheese

2013-14

2014-15

Earnings/share (adj)

19.1c

21.5c

Dividend/share

8.9c

10.1c

EPS growth (adj)

11.1%

12.45%

DPS growth

18.5%

13.78%

Price/Earnings (adj)

24.35 times

21.63 times

Dividend Yield

1.91%

2.17%

Source: Bloomberg

GrainCorp (GNC) – bid underway

Some time ago I recommended traders take profits around the $12.60 mark. Since then, GNC’s share price has fallen on fears Federal Treasurer Joe Hockey will bow to pressure from the Nationals and reject the bid by US firm Archer Daniels Midland (ADM).

Today ADM announced some sweeteners to its bid via a package of additional commitments, including an additional $200 million to strengthen agricultural infrastructure, particularly through rail enhancement projects.

From what I hear, there’s a chance Joe Hockey will impose conditions so onerous that ADM might pack its bag and go home. If this occurs then GNC’s share price could fall back to the low $9 mark – and the near 20% loss of capital this would represent isn’t adequate compensation for the profit to be gained if the bid is approved.

GrainCorp

2013-14

2014-15

Earnings/share (adj)

64.9c

72.2c

Dividend/share

39.1c

39.7c

EPS growth (adj)

-15.33%

11.17%

DPS growth

-2.20%

1.57%

Price/Earnings (adj)

17.26 times

15.51 times

Dividend Yield

3.49%

3.54%

Source: Bloomberg

2. Envestra (ENV)

A stand-off has developed between the board of ENV and its suitor, fellow pipeline operator APA Group (APT). Despite this, ENV is definitely a hold at the current share price of $1.08. It possesses irreplaceable assets that APT wants, and another  10c per ENV share (which APT can afford) should be enough to get the target board over the line.

Envestra

2013-14

2014-15

Earnings/share (adj)

8.1c

8.4c

Dividend/share

6.4c

6.8c

EPS growth (adj)

23.03%

3.61%

DPS growth

2.42%

7.59%

Price/Earnings (adj)

13.33 times

12.86 times

Dividend Yield

5.93%

6.30%

Source: Bloomberg

3. Webjet (WEB)

Shares in online airline bookings company WEB have taken a hit over the past few months after the company revised downwards its growth forecasts. Despite this, WEB remains an attractive target for online accommodation retailer Wotif.com (WTF) as the two companies’ business models are clearly complementary.

In my view WEB has now taken the bulk of its punishment for disappointing the market’s expectations. WTF is almost certainly running the ruler over its airline focused competitor – but beware that any bid from WTF will likely be in the form of WTF scrip (i.e. shares) rather than cold, hard cash.

Webjet

2013-14

2014-15

Earnings/share (adj)

19.8c

22.1c

Dividend/share

14.5c

16c

EPS growth (adj)

130.54%

11.31%

DPS growth

11.71%

10.19%

Price/Earnings (adj)

13.38 times

11.99 times

Dividend Yield

5.47%

6.04%

Source: Bloomberg

4. IOOF (IFL)

Fund manager IFL has had a stellar run recently, as a renewed sense of optimism on global equity exchanges has enhanced the outlook for companies who make fees from such market movements. IFL is a well-managed, independent company whose brand name and managerial talent should eventually make it a target for one of Australia’s ‘big four’ banks. Despite this, I believe it prudent to take some profits out of IFL, as the recent market tide that has lifted all boats appears due for a pullback.

IOOF Holdings

2013-14

2014-15

Earnings/share (adj)

51.8c

56.8c

Dividend/share

46.7c

50.7c

EPS growth (adj)

10.46%

9.61%

DPS growth

11.09%

8.68%

Price/Earnings (adj)

17.01 times

15.51 times

Dividend Yield

5.3%

5.75%

Source: Bloomberg

Woodside Petroleum (WPL)

Ever since Royal Dutch Shell made a failed bid for this company over a decade ago, WPL has been a takeover target of note. Recently Shell has made statements to the effect that its remaining 24% stake in WPL will soon be sold. Woodside is a quality business whose fortunes depend, somewhat obviously, on the price of oil (and gas), the value of the $A and its exploration success or otherwise.

If Shell sells its remaining 24% to a single buyer, then that entity will have to make a bid for all of WPL. If, however, Shell’s stake is divided up amongst fund managers, then no bid is likely in the short-to-medium term.

As there is little expectation of a bid currently built into WPL’s share price, the company remains a hold until Shell’s plans become clear.

Woodside

2013

2014

Earnings/share (adj)

$2.30

$2.82

Dividend/share

$2.32

$2.23

EPS growth (adj)

-9.03%

22.33%

DPS growth

78.76%

-3.87%

Price/Earnings (adj)

15.25 times

12.47 times

Dividend Yield

6.62%

6.36%

Source: Bloomberg

Brambles (BXB)

Right now, BXB is undergoing the opposite of a takeover; the company is proposing to split itself into two separate businesses – namely its traditional CHEP pallet arm and its Recall document storage business.

Such demergers can be value accretive for shareholders as they attract bidders to one of the separated businesses who might have been put off by the prospect of buying the conglomerate as a whole. An example of this was the decision by Foster’s Group a decade ago to hive off its pub arm Australian Leisure & Hospitality Group Ltd (ALH) as a separately listed company. Perhaps, predictably, within just a year ALH was snapped up by the aptly named ‘Bruandwo’, a bidding vehicle controlled by both pub and pokie tzar Bruce Mathieson and supermarket giant Woolworths (WOW).

Although BXB’s share price has already run in anticipation of its announced demerger, history shows that the period immediately post the listing of the once combined, now two separate companies, is when shareholders enjoy the best returns. As a result, both bits of BXB remain takeover targets for the time being.

Brambles

2013-14

2014-15

Earnings/share (adj)

46.2c

51.7c

Dividend/share

28.4c

30.5c

EPS growth (adj)

12.21%

11.81%

DPS growth

8.58%

7.32%

Price/Earnings (adj)

18.89 times

16.88 times

Dividend Yield

3.25%

3.49%

Source: Bloomberg


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