Interactive Investor

Takeover frenzy: who's next?

26th June 2015 16:46

Lee Wild from interactive investor

To say bid activity has picked up this year is an understatement. In fact, barely a day goes by without a fresh bid, agreed deal, or idle speculation among market reporters. Merger and acquisition (M&A) activity hit $75 billion during the first three months of 2015, according to Mergermarket, three times higher than the year before and a five-year record. The second quarter has been lucrative, too.

BT's £12.5 billion offer for EE, Hutchison Whampoa's $15 billion bid for Telefonica UK, and Ball's £4.3 billion takeover of aluminium can giant Rexam made up the bulk of the three-month bonanza. And there's been a rush of deals since the end of March.

Royal Dutch Shell has launched a £47 billion cash and shares offer for LNG giant BG Group, data centre provider Equinix is bidding over £2.3 billion for Telecity, and Emirates National Oil Company Limited (ENOC) has just raised its price for Dragon Oil to £3.7 billion.

And there are any number of other bids either being considered by shareholders, the EU anti-trust regulators, or UK Competition and Markets Authority (CMA). International Consolidated Airlines Group has received clearance for its €1.4 billion bid for Aer Lingus, there's £1.4 billion on the table from Arris for set-top box maker Pace, and even Crispin Odey's objection seems unlikely to stop Playtech buying Plus500 for 400p a share.

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Well-known high street brands are up for grabs, too. Just weeks after rumour mongers predicted Paddy Power would launch a £1.6 billion bid, bingo queen Gala Coral said it is courting Ladbrokes. The pair's first merger attempt 17 years ago was blocked by the Monopolies and Mergers Commission, so don't bet on it this time. If it does go ahead unchecked by the Competition Commission, Barclays reckons Ladbrokes shares could be worth 160p.

A day earlier, we heard that Thorntons had agreed a £112 million deal with the Italian maker of Ferrero Rocher, Nutella and Kinder Surprise eggs. Shareholders will get 145p a share for the struggling chocolate chain. Every country cottage owner's favourite cooker maker AGA Rangemaster is on the shopping list, too. Last week, American cooking equipment giant Middleby Corp confirmed it was in talks with the iconic British firm which has seen hard-won share price gains made in 2013 almost completely unravel.

Blue chip targets

If you believe the speculators, seven of the FTSE 100's biggest companies could be gobbled up by foreign owners.

Guinness and Captain Morgan rum maker Diageo is being stalked by Brazil's richest man, according to reports. However, Jorge Paulo Lemann's 3G Capital, who bought Burger King from Diageo five years ago, would struggle to raise the £48 billion drinks giant alone. Nomura doubts the story, too, although the broker believes the attention "could mark a sea change in share price performance after two soft years", given the shares trade at a discount to the sector.

Last year's frenzied M&A activity in the drugs sector has kept the rumour mill going. It seems, however, that some of the speculators might be testing the pharmaceuticals themselves! Latest talk is that £67 billion GlaxoSmithKline is a possible target for Pfizer. A year after pulling its bid for AstraZeneca, the Americans might pay £95 billion for Glaxo, reckon Deutsche Bank.

It's all up for grabs in media land, too. Liberty Global has been linked to a bid for ITV after taking a 6.4% stake last year, although price and strategy probably rule out a deal. However, gossip is that the cable giant will snap up mobile phone firm Vodafone instead. Rumour has been rife for some time, but debt on both sides is likely to be a stumbling block.

If that's the case, then Vodafone might buy satellite TV colossus Sky. Rivals are already doing deals - BT is buying EE and Hutchison Whampoa's 3 network is buying O2 - and Vodafone needs a strong broadband and pay TV service. Both Vodafone and Vivendi are said to have approached Sky, but been put off by the 1,800p a share asking price.

And despite BT being busy with EE, there's speculation that Deutsche Telekom wants to buy the British telecoms giant. Merging its T-Mobile US business with satellite pay-TV operator Dish Networks would allow Deutsche to exit America with enough cash to bankroll a takeover of BT, they say.

There's been a constant drip of bid speculation out of the water sector for years, and reports in the weekend press have Borealis Infrastructure paying £5 billion for Severn Trent. Now, it wouldn't be the first time that the Canadians have tried to buy Severn. In 2013 they launched an unsuccessful bid at 2,200p a share. Water companies have tended to attract a buyout premium of close to 35%, which implies Borealis would have to find at least 2,400p this time.

Any others?

Oil companies are falling like flies right now. Or rather they should be. BG and Dragon Oil are on the way to new owners, but potential buyers are balking at some pretty hefty valuations, which is holding back M&A.

Once momentum builds, however, Goldman Sachs knows the names it thinks will fall. "We expect well-funded majors and NOCs [national oil companies] to scrap high-cost, high-complexity projects and focus on gaining exposure to low-cost projects via M&A," said Goldman recently.

It correctly identified Dragon as vulnerable. Others on its list include Tullow Oil, Africa Oil and Genel.

Miners have had a torrid time recently, too, and one might expect an element of bargain hunting here. Investec Securities thinks coal prices have bottomed out and believes increasing M&A activity "is generally a good sign". Gold assets are increasingly popular, too. Iamgold is sniffing around AngloGold Ashanti's stakes in two Mali mines. However, assets are not being sold at firesale prices and Newcrest may shelve the sale of its Telfer mine.

"The gold sector is the one area of mining that has so far seen healthy M&A activity that is indicative of a cyclical recovery," says Investec. "However, that clearly doesn't mean that there is a buyer at any price - something has to be left on the table for the next party."

Elsewhere, the planned merger of Dutch supermarket chain Ahold and Belgium's Delhaize has excited UK players, mainly Morrisons and Sainsbury's. There might be something in it - Morrisons was on private equity firm CVC's radar in 2007 and the Qatar Investment Authority already owns 26% of Sainsbury's. However, an industry price war has yet to play out, and any potential buyer might bide their time.

Perennial takeover favourites…

Making special ingredients for cosmetics companies means Croda could be an attractive target. Deutsche Bank certainly thinks so. "With many management teams assuming that the macro will remain subdued for some time and with strong balance sheets in general, we expect M&A to continue in the coming 6-12 months," it says. Croda is "potentially vulnerable to consolidation".

Meggitt has been a takeover favourite for as long as I can remember. Earlier this month, and after an 18% slump in the share price since mid-April, Investec said 'buy'. It blamed concerns about cash generation and a sluggish aftermarket for the sell-off, but thinks things have gone too far.

"We believe these concerns are unjustified and present a good entry point into a structural growth story trading at a discount to peers," said analyst Rami Myerson. "The current share price does not reflect upside optionality from potential M&A interest in the group. We reiterate our Buy rating and DCF [discounted cash flow] derived 600p price target." Ed Stacey at Espirito Santo has also upgraded to 'buy' with 550p target, and UBS analyst Charles Armitage believes that despite there being a low probability of Meggitt being acquired, the current share price no longer contains an M&A premium.

Engineers have been vulnerable post-crash - Chloride, Tomkins, Charter and Invensys have been snapped up since 2010. And UBS believes activity is about to pick up. UK engineers may appear expensive versus history, but they still trade at a discount to US peers, says the broker, which estimates total M&A firepower of more than $150 billion (£100 billion).

"Current market multiples are most likely to be the sticking point at present, and we may need a further pull-back before any deals take place."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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