Hey, M&A?
The possibility – or probability – of the UK experiencing an M&A wave has been discussed for some time. Relative to most markets the UK is cheap – in fact it’s been underperforming for the last five years. Sterling weakness doesn’t help but the impression is that CV19 has put many would be acquirers off because they can’t figure out what the future looks like. Despite everything corporate raiders are human too, you know … well, sort of.
However, there have been stirrings of corporate activity – the bid for Rsa Insurance (LON:RSA), the (lowball) offer for Codemasters Group (LON:CDM) and a few others. It feels like there could be a lot of takeovers happening in the near future.
I’ve been buying Itv (LON:ITV) with this in mind. As a trading opportunity it’s struggling with advertising revenue and the change in the way that people – especially young people – consume content (aka streaming) but as an asset for any one of the production or content companies out there it looks like a startlingly cheap way of getting your hands on a massive library plus ITV Studios.
I also fancy M&g (LON:MNG) and Pearson (LON:PSON) as targets – the latter is simply dirt cheap compared to other asset managers, while the latter looks a sitting duck due to its struggles to convert its educational content into an effective digital offering. On that note it looks like they’re getting near an inflection point but there must be a lot of frustrated holders out there who’d welcome being put out of their misery.
Anyway, does anyone have any better – or at least different – ideas?
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22 comments
First time poster. I bought into Aa (LON:AA.) (AA plc) about 2-3 months ago. I first looked at it, as it was an acquisition target (by a few PE consortiums), but as I looked into its fundamentals, I decided to buy Aa (LON:AA.) anyway, regardless of the potential of a takeover. It's price has been battered, primarily due to its high debt load (which was as a result of a previous PE loading up its long term debt position), but as I looked deeper into Aa (LON:AA.), it has been steadily working hard to chip away at the long term debt position between 2015 - Jan 2020 (by 20.5%). With a FCF gain of 37% from Jan-19 to Jan-20 (remaining positive FCF QoQ during the Covid downturn), I firmly believe that even if they are not bought out (we will know who is going to bid, if anyone in 4 days), I think it's direction on its own to continue on the path to lower debt, makes this a good buy at a PE of 2.4 (as of Jan-2020).
Just to add, I don't think this is one that I would put a large allocation of my portfolio into, but even at a 1%-3% allocation, at such a low PE/price, you can grab a lot of shares with low risk to your portfolio. (the price has jumped 46% this month alone).
'They' say you should have other reasons for holding a stock than a possible takeover. This is because they can take years to materialize. Indigo vision is an example.
So does the opposite apply? One should get rid of stocks that are unlikely to be taken over. I have just sold MCRO (Microfocus) for a tiny profit because the debt is high and would deter a bidder.
MNG (M&G) is unlikely to be taken over, in my humble opinion. It has only just been listed as a spin off from PRU. Stocko gives it value but other data bases do not. I have also just sold for the 3rd time this year. It is a good trading stock.
However there are candidates in the same sector IMHO where funds under management are critical but where ETF explosive growth threatens AUM. I bought the Premier Miton story and have reluctantly just sold because it had become too popular.
Also in the Insurance sector IMHO the losses from Covid throw up candidates IMHO.Hansteen (HSTN) has gone. I hold RSA. Who's next?
Take-0vers are annoying because they often target shares I have looked at but rejected because of drooping prices. Entreprise Inns as an example. I was even holding Green King but selling down when the bid was made. G4S another.
Hi aflash
'They' say you should have other reasons for holding a stock than a possible takeover. This is because they can take years to materialize. Indigo vision is an example.
Completely agree. I was around when Paul went full monty on Indigovision (LON:IND) - must have been early noughties. It may be hard to believe but he's calmed down since ...
My reasoning here is that we have a unique combination of circumstances - a bunch of good companies with unique IP that are already marked down because of CV-19 and Brexit. All of which would be of interest to overseas buyers who will be looking at sterling recovering when we're out of the immediate crisis and might reckon there's a window of opportunity.
I have absolutely no insight into what might get bought and when, but I am pretty sure that there will be M&A. In the meantime the vaccine related recovery will probably reflate the stocks involved anyway. I don't want to buy death spiral stocks at any price.
Insurance is interesting - I hold Prudential (LON:PRU), Aviva (LON:AV.) and Legal & General (LON:LGEN) but don't see any of them as obvious M&A candidates. But I struggle with the economics of the sector, so I don't know who would be an obvious target?
I agree with you on takeovers though. On a personal level most takeovers I've been on the end of have been really annoying. ARM and Cadbury are the two that come to mind - why would investors sell up for a short-term premium when they're giving up ownership of irreplaceable assets?
There's a frustrating attitude of short-termism in investors in the UK. Some of that is born out of the fact that our market isn't big enough to support the growth of global champions - there's a reason why most of those come from the US and China. But throwing the few we have away for a short term premium seems insane to me.
timarr
Insurance is interesting - I hold Prudential (LON:PRU), Aviva (LON:AV.) and Legal & General (LON:LGEN) but don't see any of them as obvious M&A candidates. But I struggle with the economics of the sector, so I don't know who would be an obvious target?
our market isn't big enough to support the growth of global champions
Indeed. None of the above would sell out cheaply. PRU is spinning off Jackson Life after M&G, tried to buy AIG in the GFC and must have a lot of shareholder support. AV. has just bought Friends Life.
There are mega-deals, Allstate has just bought out NGHC. There will be more so Homework required.
There are smaller deals, Peter Wood's ESUR has 'esured' his retirement. PGH (Personal Group) would be a candidate in that category with the founding shareholder retired but still holding 37% of the company. I have just bought on that argument plus recent big drop, + 3 screens, + showing much more value than the rest of the sector along with JUST (I also hold). Maybe you can add some insight on PGH's boast of being a H.M. Govt G-cloud supplier
There are many strands to insurance. SBRY is looking to unload its insurance arm. Are you going to buy on the basis of the returns from that sale?
Lloyd's syndicate losses are worse than predicted. There is a fight going on to have Business loss insurance applied to Covid. The insurance companies have refused but the jury is out. BEZ (Beazly ) and HSX (Hiscox) have raised funds. These and LRE (Lancashire holdings) are on the radar of international insurance watchers. Catlin (I held) was bought out a few years ago. In this space if the company gets its sums wrong, reinsurance at wrong price etc, it Has to be sold to stop the insurance house of cards collapsing.
Then there is the problem of bonds which insurance companies are obliged to hold to meet their liabilities but offer negative real returns. The comprehensive houses which include the three you mention above, offering insurance and savings products have a problem................but that is another story.
As regards M&A it’s worth also keeping an eye on the current possible bid situation at TalkTalk. I understand that Toscafund Asset Management have been given until 3rd December to submit a formal bid.
TalkTalk popped up on the radar in June when Directors were buying heavily in the 87 to 95p range. Might suggest that they see much more value in the company than the current share price of 95p.
Not currently a holder – is anyone else following TALK?
Morning Timarr
Stocko members who have read my posts will be aware that I have been banging on about the intrinsic value in Itv (LON:ITV) for a long time. Among my many mistakes was a failure to recognise the impact of digital advertising on Itv (LON:ITV), as a consequence I bought the shares much too early. Therefore despite adding to my holding at around 59p at the height of the pandemic and recent improvement in the share price, I remain the poorer for my investment, although with the benefit of previous generous dividends I am perhaps close to break even.
ITV Studios and the back catalogue are in my view worth more than the current share price, the nascent streaming operation and conventional advertising, which despite the progressive decline still has value, are to my view in the price for free. My bests guess is that Itv (LON:ITV) will eventually be bid for or perhaps involved in a merger with one of its peer group that is also struggling to compete with the continued evolution of streaming and digitisation. I recognise the quality of the content produced by Netflix and its contemporaries but given the gulf in valuations and mountain of debt, certainly for Netflix, I would rather be invested in £ITV.
Itv (LON:ITV) is only one of two consumer facing stocks that has remained in the portfolio throughout the pandemic. Providing I can see still value in a stock my approach is to stick with it. Once the price reflects my view of the value I will sell.
I am talking my own book and may well be wrong, as I was in original investment, time will tell.
All the best
Whilst I tend to agree, I don't see enough incremental value created for the big fish from ITV's content? Do you think the next leg up in subscribers are likely to come due to ITV's content? I think their focus is on tapping emerging markets like India, where there are millions being connected to data devices now and consume content like nobody's business.
No position, but just intrigued!
Itv (LON:ITV)
It's also worth keeping in mind the expansion of Britbox US, which now has 1.5m subscribers vs 1.0m announced at the end of the last year. The serice was launched in 2017.
The annual subscription cost is $69.99 i.e. the current annualised revenue = $105m = £80m.
This is a 50/50 JV with the BBC, but it's quite clear there is value for the studio as a production and a streaming service.
Well, I hope so anyway.
A
Hi Timarr,
First time poster here, so just wanted to take the opportunity to say a big thank you as I’ve enjoyed reading your commentary on a number of issues in recent weeks.
Pearson (LON:PSON) is one that, from my previous professional experience working in educational publishing, I might be tempted to avoid. UK curriculum policy is set to undergo a major change in the next few years with the toll out of a programme called the Curriculum Fund. The latter will see the Department for Education provide free resources (textbooks, lesson plans, worksheets, the full shebang) across Key Stages 2 and 3 for a number of years, with an intent to roll this out across key stages 1 and 4 too.
A notice of Invitation to Tender was set to be published in the OJEU in March 2020 but was delayed due to Covid-19. The blueprint of the programme was subsequently redeveloped into the online Oak National Academy offering promoted by the DfE over the summer. Nonetheless. The Curriculum Fund programme looks set to relaunch in the coming months, with it being expanded to include phonics. The UK National market therefore looks rather bleak. While I know the size of the UK market only represents 8% (if I remember their 2020 accounts correctly) of their earnings, it is the testbed in which they create and iterate their products. The new CEO could turn things round but, I’m slightly bearish. That said, your investment decisions are usually wider than mine :)
Hi Bambi
Welcome and thank you and don't believe anything from anyone when it's your own money you'll lose :-)
I get the Pearson (LON:PSON) issues. I've invested on and off in them for nearly a decade and it's been a miserable experience. The company has been a serial destroyer of value and has thrown overboard a whole bunch of valuable assets in the process. So I don't offer this up as a long term success story.
But as a possible M&A candidate I think there are some opportunities. The underlying IP is valuable. The digitisation of their content is finally near completion. The shareholders are out of patience with the poor performance of the company - Cevian are now on board - they're an activist investor and are unlikely to accept the status quo.
I am talking my own book, though. And M&A is incredibly hard to judge. Put it this way - I wouldn't want to bet a whole load of money on it. Although that's true of everything.
Anyway, welcome again. Post more often. It's always better to test ideas on a savagely critical audience ... :-/
timarr
Hi Timarr,
Great thread whats your thoughts on Photo-me International (LON:PHTM): one of the board has been buying millions of pounds worth of stock in recent months and now holds 27.8% of the company.
A private equity outfit have 7% of the stock so wonder if something in the offing, I don't think they hold enough between them to pull off a Fusionex style robbery but equally if any bid comes can't see much more than 20% premium given business must be suffering big time in current lockdowns.
The situation does look interesting though as top man has been spending serious moolah to up his stake.
A private equity outfit have 7% of the stock so wonder if something in the offing, I don't think they hold enough between them to pull off a Fusionex style robbery but equally if any bid comes can't see much more than 20% premium given business must be suffering big time in current lockdowns.
Hi clarea
Photo-me International (LON:PHTM) is Serge Cranianski's company - he owns nearly 28% of the company but he's 78 now, so you have to wonder what the end game is; presumably he feels that the current price undervalues the company significantly. But it's hard to see how anyone can pull off a bid without him on board, so I doubt there's much risk of shareholders being stitched up.
My guess here is that nothing will happen until the pandemic is largely over and the price recovers but even so Cranianski doesn't give the impression of someone about to retire into the long grass.
timarr
Thanks for the reply Timarr I just wonder if they might join forces and take it private with a low ball offer with carrot being its refloated a couple of years down the line at a higher price and that's when Serge cash's out.
Great thread Timarr. Thanks for starting - what do people think of £Vod ? High debt pile, granted, but I think the sum of the parts is far higher than the current mCap. Then there's the spin off of the TowerCo (Vantage) in 2021 , which should realise close to £20bn value for them, and with the 5G boom to come, an asset base of towers should be quite attractive IMO. European assets should specifically be quite in demand I would've thought.. No position yet for me, but tempted to dip my feet into this.
Also keen on getting into Itv (LON:ITV) as I do think there's upside from here.
Thanks for starting - what do people think of Vodafone (LON:VOD) ?
Hi Pokiry2000
Err, dunno really. Is it really a likely M&A target? If they raise £20 billion from the Vantage Towers IPO then there's no threat to the business, but I'm just not sure who would want to buy them? PE perhaps - but they're already doing a pretty good job of cutting costs.
Itv (LON:ITV) is a far less attractive business - the pandemic means the streaming giants are just taking market share, but at the current price you'd think it's a sitting duck for any of them with the spare change jingling around in their spare pants. Doesn't mean it'll happen, mind, but I like the odds.
However, my record of predicting M&A is negatively correlated with actual M&A so we can expect ITV to shortly go bust and a mega-bid for Vodafone later this week ...
timarr
Hi Timarr, agree re ITV the likes of Apple TV and Disney have minimal content other than the odd blockbuster like The Mandalorian.
Even if you have a budget of hundreds of millions you can't knock out hours of blockbuster content in three months and that's in normal times, so agree at some point it should be a shoe in for one of the cash rich newer entrants.
I also like the fund management area high operating margins and teams of only 40-50 people can run billions of pounds worth of assets, once you have the team in place and the infra-structure its very easy to scale up considerably.
I hold Polar Capital in this space spread can be a bit high at times but generally find post 4pm it narrows back down to sub 1% and there has been a huge amount of take overs/mergers in this area in the last year.
Hi clarea
Agree on Itv (LON:ITV) (see response to abtan below).
Fund management looks interesting as a sector anyway. I chased M&g (LON:MNG) all the way down to 91p in the crash, but even back up at 170p odd it's still only just above tangible book value. Of course, it's at that level for a reason, but it is cheap as chips.
Anyway, I agree that the sector remains open for takeovers. But apart from the aforentioned I don't really know how you'd identify the most likely targets.
timarr
Hi Timarr
Incidentally I purchased Itv (LON:ITV) a couple of weeks ago and was happy with the update provided today.
For reference I purchased due to the increasing demand for new productions worldwide combined with ITV's growing studio arm.
My notes from May if they of interest to you/anyone else:
+ve:
a) Making £350m FCF pa vs EV £4m
b) Studio growing reasonably (+12%)
c) High recurring revenues
d) debt looks manageable
e) c 10% yield once normality returns (end of 2021?) so share price will rise to reduce this in % terms
-ve:
a) Studio EBITDA not increasing as quickly as revenue (cost pressures?)
b) High customer concentration (+25% ad revenue from 1 agency)
c) this year (2020) will be very bad, I don't think the forecast reflects this
For reference I purchased due to the increasing demand for new productions worldwide combined with Itv (LON:ITV) 's growing studio arm.
Yep. My son-in-law and one of my best friends work in the content creation and management industry - with a lot of content delayed at the moment the back catalogue is even more valuable. Throw in ITV Studios and you have something that looks uniquely interesting.
I'm less worried about the actual P&L and the fall off in advertising - although they said today that they expect it grow in Q4 - but I agree that with a return to normality this would look cheap regardless. I find it hard to believe that it'll still be independent in two years time - but I thought that two years ago.
Bought back in on Monday before the magic Pfizer vaccine caused instant revaluation of the entire market. Too much cheap money shared between too few braincells if you ask me (which is why no one's asking me, I suppose).
timarr
Hi timarr
Thanks for setting up this thread which I think got lost in the market noise. I have little to contribute as I am generally rubbish at spotting takeover candidates. My observation though is that it is the companies that are on cheaper ratings being snapped up (even Codemasters Group (LON:CDM) for example, is cheap relative to peers). If this week’s reaction to the vaccine breakthrough has highlighted anything, it is that I don’t have enough beaten up Covid affected value/recovery plays in my portfolio (I have deliberately avoided them to be honest).
My point being that a list of value plays will most likely yield prospective takeover candidates. Perhaps?
I shall follow the ideas on this thread with interest and chip in if I can add any value. For now, the only real value play I have in my portfolio is Reach (LON:RCH) but with brokers printing 300p (N+1 Singer) and 600p (Panmure - although I have not seen this note) price targets and the pivot to digital in the early stages, I doubt they will be in play just yet. I am also looking at my portfolio holdings with cash on the balance sheet (most of them) and wondering if they will be snapping up some bargains which of course, is the other side of the M&A coin.
Cheers
Simon
Hi CC
My point being that a list of value plays will most likely yield prospective takeover candidates. Perhaps?
Maybe. I don't think value is what it used to be :-/
I'm far more interested in intellectual property than actual property - Codemasters Group (LON:CDM) probably has less of that than its peers but it falls in the same category. But I also suspect overseas buyers will take a longer view of all sorts of assets - take Great Portland Estates (LON:GPOR) for instance, which recovered quite sharply this week, but is still sitting at a significant discount to net asset value. But will London footfall ever recover? (Yes, I imagine, but it will take longer than everyone expects).
Reach (LON:RCH) is interesting - I took a hard look but decided not to invest. I get the business opportunity but I'm just biased against companies with legacy pension schemes. But it's a good example of some of the real value lurking around in the nether regions of the markets - the local news brands are intinsically valuable if you can figure out how to sweat them. But Daily Mail And General Trust P L C (LON:DMGT) in the Mail Online has the most popular English language website in the world ...
But I'm also rubbish at spotting takeover targets, hence the thread. Hoping someone better than I am will come along :-)
timarr