Hunting for takeover candidates

Thursday, May 10 2018 by
18

Merger and acquisition activity typically picks up at the late stages of equity bull markets, fuelled by optimism and the need of large companies to maintain earnings growth rates by any means possible. 

So here we are, with debt financing rates still extremely low for large companies (see very low investment-grade credit yields), billions upon billions of pounds/dollars piled up at private equity houses seeking an investment home, and US tax reform delivering a profits bonanza to US companies. 

Hardly surprising then that the desire for bolt-on acquisitions has grown, with a number of deals being announced this year alone in the UK market. The Japanese pharmaceutical company bidding £48/£49 for Shire is simply the latest in a series of such deals, Fox or Comcast for Sky being another. 

I believe that now is a great time to be looking for takeover candidates to invest in. However, I apply one simple rule - I don't invest in a company simply because I believe it to be a potential target for an industrial or financial buyer; I only buy when the underlying fundamentals and valuation are also attractive. 

So here is my (non-exhaustive) list of companies that I consider to be potential candidates for industrial buyouts by (typically larger) competitors [note, I have invested in most of these]:

  1. Elegant Hotels (LON:EHG): Elegant Hotels seems attractive to me in that it is a Caribbean-based hotel group that trades still at a discount to book value, expects rising sales and has a 33% upside to consensus broker price target. Most importantly, approaches have already been made to buy the group by the Spanish hotel chain Sol Melia in the recent past. 
  2. Revolution Bars (LON:RBG): Revolution Bars (written about at length by Paul Scott) continues to expand at a steady pace, has very little debt and funds new bar expansion via internal free cash flow, and looks set to recover to a double-digit return on capital. It has previously been bid for by pub/nightclub owners Stonegate and Deltic in the recent past (203p Stonegate bid was rebuffed by shareholders). 
  3. Gocompare.Com (LON:GOCO): GoCompare continues to post strong top-line and EPS progression, and yet is only rated at a modest 13x prospective P/E for an online-based company with very strong brand awareness (who doesn't recognise the TV ads?) and triple-digit ROCE profitability. Online property portal ZPG (LON:ZPG) has already had a 110p bid for GoCompare rejected, and today GoCo's share price still stands at only 113p.
  4. EI (LON:EIG) (the artist formerly known as Enterprise Inns): yes pubs are a tough industry to be in, no doubt. But that didn't stop Heineken and a private equity firm teaming up to buy out rival Punch Tavens a while ago... A deep value stock at 6x P/E and 0.4x price/book, however burdened by a lot of debt (usually a no-no for me, it has to be said). I still think that this holds attractions, most probably for a financial buyer. 
  5. Entertainment One (LON:ETO): TV content to feed the growing number of digital TV channels and also streaming video sites focuses value in the content providers like Entertainment One with their large library of TV series and films, Peppa Pig prime amongst them (apparently super-popular now in China!). We are seeing a whole host of programming content acquisitions in the US and UK as the pressure from Netflix and Amazon only ever grows, Fox/Comcast/Sky just one example. Under 12x P/E and a lot of value in their film back-catalogue in particular, this looks a prime takeover candidate in my eyes.
  6. French Connection (LON:FCCN): This has been such a retail dog for so long despite the obvious deep value attractions, that I just don't know what to say anymore. Except that Sports Direct (SPD) have built up a 26.7% stake, and may thus have designs on the brand (they have form in acquiring other brands which are then exclusively sold through Sports Direct). Again another stock that Paul Scott has written on fairly extensively.
  7. Shire (LON:SHP): Yes I have some Shire and expect the Takeda deal and the potential for a counter-bidder to emerge to push the current share price back up above 4000p and closer to Takeda's bid price. 
  8. Smaller fund managers (Miton (LON:MGR), Polar Capital Holdings (LON:POLR),  Premier Asset Management (LON:PAM) ) will be tempting for larger fund managers to take over, as economies of scale have only grown larger following the implementation of MIFID II regulations. 

Do you have any more names to add to this list? Please feel free to add them in the comments...


Edmund


Filed Under: Merger And Acquisitions,

Disclaimer:  

My opinions only, not investment recommendations: Please Do Your Own Research

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Elegant Hotels Group plc is a holding company. The principal activity of the Company and its subsidiaries is the ownership and operation of hotels and restaurants on the island of Barbados. It owns and operates six freehold beachfront hotels and a beachfront restaurant in Barbados. Its hotels include Colony Club, Tamarind, The House, Crystal Cove, Turtle Beach and Waves. It operates Daphne's restaurant, which is located on platinum West Coast in Paynes Bay, adjacent to The House and Tamarind in Barbados. Its Colony Club hotel is spread across six acres of tropical gardens with approximately 300 feet of beach frontage on the Caribbean Sea and lagoon style pools. Its Tamarind hotel is on the Platinum Coast. Its Crystal Cove hotel has three freshwater lagoon pools, two restaurants, two bars, two floodlit tennis courts and a fitness center. Its Turtle Beach property is on the south coast of Barbados. Its portfolio consists of over 550 rooms. more »

LSE Price
73p
Change
 
Mkt Cap (£m)
64.8
P/E (fwd)
7.4
Yield (fwd)
4.6

Ei Group plc, formerly Enterprise Inns plc, is a leased and tenanted pub company in the United Kingdom. The Company includes a portfolio of businesses comprising a range of operating models and trading styles. Its businesses include Ei Publican Partnerships, Ei Commercial Properties, Ei Managed Operations and Ei Managed Investments. Its Ei Commercial Properties business manages a developing portfolio of assets, which it leases to third parties on commercial property terms. Its business also provides asset management support for its leased and tenanted, and managed house businesses. The Ei Managed Operations business manages approximately 100 pubs with over 30 trading under its Bermondsey operation and approximately 70 under its Craft Union operation. It also develops standalone and residential sites on land that is surplus to pub requirements. The Company has over 4,400 properties that are run as leased and tenanted pubs. more »

LSE Price
213p
Change
 
Mkt Cap (£m)
970.2
P/E (fwd)
10.0
Yield (fwd)
n/a

Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

LSE Price
73.7p
Change
1.5%
Mkt Cap (£m)
36.9
P/E (fwd)
11.9
Yield (fwd)
6.8



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7 Posts on this Thread show/hide all

Beginner 10th May '18 1 of 7
1

Constant rumours abound of a $LBTYA bid for ITV (LON:ITV) . They already have a small holding in the company. The recent price slip at Solid State (LON:SOLI) may make it vulnerable too.

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ricky65 10th May '18 2 of 7
1

Interesting list. I'd add a potential bid from ITV (LON:ITV) for STV (LON:STVG) as it's the last independent member of the ITV network standing.

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Keith Hill 10th May '18 3 of 7
1

Renishaw (LON:RSW) is performing well. I believe that the Chairman and Deputy Chairman hold about half the stock between them and both are in their seventies, so perhaps a retirement sale is possible.

In a recent Small Cap report, Graham Neary wondered whether an American food business might be interested in acquiring Treatt (LON:TET).

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Edmund Shing 11th May '18 4 of 7
1

Well Silver Lake (private equity) has this morning announced a recommended offer to buy ZPG (LON:ZPG) (Zoopla) for 490p in cash, a 30% premium to the previous share price. So UK takeovers continue apace, I think this theme has a long way to run yet...

Clearly online cash-generative business models are attractive even to financial buyers right now, so this might be good for the likes of Gocompare.Com (LON:GOCO) and others...

Blog: The Idle Investor
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Edmund Shing 11th May '18 5 of 7
2

Gocompare.Com (LON:GOCO): Nice breakout today with above-average volume on the back of the offer for ZPG (LON:ZPG)... 120p+ now... 

5af557c9a2fa6GOCO.JPG

Average analyst price target is 131p suggesting more upside, valuation still moderate for an online cash-generative company... Also a spin-off from esure; remember that spin-offs tend to outperform the market, from Joel Greenblatts' research. 

Blog: The Idle Investor
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Howard Adams 11th May '18 6 of 7
2

Hi

For those holding Purplebricks (LON:PURP) this from Sky Business News might interest you if you have not already seen it.

'Online estate agents eMoov and Tepilo in £100m merger talks'

https://news.sky.com/story/online-estate-agents-emoov-and-tepilo-in-100m-merger-talks-11366521

Regards
Howard

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Taff6 10th Jun '18 7 of 7

20 Shares based on a stock screen only,

5b1d8e2ea3f60Bargain_shares.JPG

Screener is also indicating good value in the following industry groups, Hotels & Entertainment Services, Media & Publishing, Metals & Mining and Passenger Transportation Services. 

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