Good afternoon!
I recorded a new audiocast yesterday, with Paul Hill, a successful value investor, and analyst. It's in two parts, because the phone call failed part way through. Warning - it's very long, as we covered loads of material.
One of the things we discussed is the surge in M&A activity, and also how pension deficits no longer seem to be the poison pill to block takeover bids that it's generally assumed they are. So bizarrely, two of the companies with the worst pension deficits in the small caps area, AGA Rangemaster (LON:AGA) and Thorntons (LON:THT) have both now received bid approaches.
I am increasingly coming round to the view that we are now in the last, euphoric, stage of this bull market. High levels of M&A activity is one sign of that, as are increasingly stretched valuations, indeed crazy valuations on blue sky & fashionable sectors (especially in America). Plus there are other signs of euphoria here in the UK - e.g. shares shooting up on newspaper and magazine tips, and large, spurious speculative rises in micro caps on no news.
It all points to a market that is seriously over-heating in some areas - which I suppose it was bound to eventually if interest rates remain close to zero for long enough - if people can borrow at almost nil cost, they will often allocate capital badly, chasing returns that would not normally be economic, and speculating wildly on things they know are over-priced, in the expectation that they will be able to sell before the crash.
I reckon we're heading for a major market correction or crash at some point in the next (say) two years, as it's all beginning to feel a bit like 1998-99 again - and remember what happened when the bubble burst in 2000-2002 - carnage for speculative stocks, but quite good for value stocks of course.
Thorntons (LON:THT)
Share price: 144.5p (up 42% today)
No. shares: 68.9m
Market Cap: £99.6m
Recommended cash offer - it looks as if the Ambassador will be spoiling us with pyramids made from Thorntons chocolates now too, not just Ferrero Rocher!
Ferrero International S.A. has bid 145p in cash for Thorntons shares. They're not mucking about either, and have already bought about 30% of the company by acquiring the entire holdings of Crystal Amber Fund (18.3%) and others.
My opinion - given that Thorntons has struggled in recent years to make further progress after its turnaround, and that it has a weak balance sheet with a lot debt, and a pension deficit, then I would be gratefully accepting this offer, if I held Thorntons shares. It looks a generous price, for a struggling business.
Clearly Ferrero must think they can revitalise the Thorntons brand, and presumably strip out some costs too. Ferrero is an Italian group, with turnover of E8.4bn last year, and its other brands include Kinder, and Nutella. It made a profit of E907m last year, so it's buying Thorntons out of petty cash really!
So, M&A activity is very much the order of the day - cash-rich large caps buying up smaller competitors. I wonder which companies will be the next targets?
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