Three hot takeover buys

These companies are worth owning, if you don’t have them already.

Summary: Mergers and acquisitions activity is picking up across Australia, and several companies stand out as potential targets. Three on the radar screen as potential buys include a listed mortgage broker, an online travel bookings company, and an oil and gas giant.
Key take-out: As well as the strong buys, there are also a number of companies that are sells. This is primarily because their share prices have risen strongly, and at current levels they are fully priced.
Key beneficiaries: General investors. Category: Mergers and acquisitions.
Mortgage Choice (MOC): Outperform (under review).
Webjet (WEB): Outperform (under review).
Woodside Petroleum (WPL): Outperform (under review).
Bega (BGA): Neutral (under review).
Coca-Cola Amatil (CCL): Neutral (under review).
GrainCorp (GNC): Neutral (under review).
Brambles (BXB): Underperform (under review).
Envestra (ENV): Underperform (under review).
IOOF (IFL): Underperform (under review).
Warrnambool Cheese & Butter (WCB): Underperform (under review).

Activity across Australia’s mergers and acquisitions space is accelerating, and there are strong expectations that more big deals will unfold this year.

The tussle for control of Warrnambool Cheese & Butter between Canada’s Saputo and Australian dairy heavyweights Bega and Murray Goulburn – a takeover play I predicted would unfold in September last year in 10 stocks in takeover spotlight – has set the scene for more big deals in 2014.

Over the past few months I’ve made a number of takeover target recommendations for Eureka Report subscribers (also see Six hot takeover targets) and, as a number of deals are now at or close to fruition, an update is overdue.

Firstly, here is a list of the companies about which I’ve written since October 16, 2013:

  • GrainCorp (GNC);
  • Warrnambool Cheese & Butter (WCB);
  • Mortgage Choice (MOC);
  • Bega (BGA);
  • Envestra (ENV);
  • Webjet (WEB);
  • IOOF (IFL);
  • Woodside Petroleum (WPL); and
  • Brambles (BXB).

I’ll now divide these recommendations into three basic categories of ‘Buy’ (if you don’t already own them), ‘Wait/Hold’ (self explanatory) and ‘Sell’ (if they’re currently taking up valuable space in your portfolio).

The ‘Buys’

  1. Mortgage Choice – This company is Australia’s leading mortgage broker by market share, and Commonwealth Bank (CBA) owns 22% of its issued capital. When I first recommended this stock in late October 2013, its share price was around $2.85. Since then it has risen, albeit somewhat unspectacularly, to $2.98. Given continued low interest rates combined with a rising housing market, MOC remains a buy below $3 per share.
  2. Webjet – When I recommended this airline ticketing and travel bookings business in late November 2013, the company had been hit by a series of profit downgrades that saw its share price fall from $5 to just $2.60. Since then, WEB’s shares have recovered a little to $2.80, a level at which the downside seems limited and the upside attractive. A scrip-based merger with fellow travel site remains on the cards.
  3. Woodside Petroleum – Recent press reports have suggested that Woodside’s 24% shareholder Shell will seek to exit its stake before the end of the current financial year (i.e. June 30, 2014). If Shell sells to a single buyer, then a follow-on bid for the entire company is mandatory under Australian law. If, however, the 24% stake is broken up and sold to institutions, then a large overhang on WPL’s shares will have been removed. In either case, and barring a collapse in oil and gas prices, the result for WPL shareholders should be positive.

The ‘Wait/Holds’

  1. Bega – Just over a week ago, BGA’s directors decided to accept Canadian giant Saputo’s unconditional all-cash bid for WCB. This move has netted Bega around $100 million in cash, and a substantial portion of this is a profit on the cost base of its original WCB stake. BGA is now the next big listed dairy target in Australia, as major competitor Murray Goulburn is an unlisted co-operative. New Zealand’s Fonterra has maintained its 10% stake in BGA and, over time, I expect it to increase this holding. Asia’s demand for dairy products isn’t going away anytime soon; as a result, BGA remains firmly in play.
  2. Coca-Cola Amatil – I’ve decided to sneak this one onto the list, as its recently weakened share price may soon provide an attractive entry point for patient investors. CCL shares have fallen due to lower-than-expected demand in its South-East Asian businesses, combined with a beer expansion strategy many analysts view as flawed. While I view the current share price of around $12 as a tad high, below $11.50 per share CCL remains a strong buy given the interest foreign buyers have previously shown in Australian beverage companies (e.g. Foster’s and Lion Nathan).
  3. GrainCorp –In late November 2013, I recommended taking profits in GNC as the chance of a federal government knockback for the bid by US concern Archer Daniels Midland was a real concern. Unfortunately for proponents of free trade and open markets, Treasurer Joe Hockey did reject the bid, with the result that GNC’s share price fell from around $12 to just $8 now. Despite this fall, the vagaries of wheat growing seasons mean I’d like to GNC shares drop another 50 cents to $7.50 – at which they’d be a buy.

The ‘Sells’

These remaining four stocks are ‘sells’, not because they’ve failed but because they have succeeded. In each case, either the predicted bids have played out or the stock has risen for other reasons, and further price increases seem unlikely in the short-to-medium term. Investors and traders holding these shares should take their profits and look for new opportunities:

  1. IOOF – Although this strong performing fund manager hasn’t received a bid, general sharemarket strength combined with investors’ newfound fondness for asset managers means that IFL is now fully priced.
  2. Brambles – This company’s demerger of its Recall (REC) document storage business (i.e. the reason for investing) was completed in December last year. Since then, the total value accruing to shareholders of both BXB and the one-for-five spin-off of REC totals around $10 per pre-demerger BXB share. At this price, BXB has run its course for the time being.
  3. Envestra – In late November 2013, when ENV was trading around $1.08 per share, I recommended shareholders hold for an increased bid from APA Group (APT). Happily, such an increase to $1.19 per ENV was achieved, and now the ENV board has agreed to the new terms. At its current price of $1.16ps, there is little left on the table for remaining ENV investors.
  4. Warrnambool Cheese & Butter – In contrast to the GNC bid, this three-cornered contest has had a most happy ending for shareholders, with WCB’s shares rising approximately 75% from the first bid to last. As mentioned above, former bidder BGA has pulled out of the race now that the triumphant Saputo has won the day. At $9.43 per share, WCB shareholders should take their money and look for the next opportunity in the agricultural space (again, see above).

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

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