Top 10 M&A targets in 2020
We have a look at the top potential takeover targets for 2020 and explain how investors and traders can capitalise.
Why investors and traders should watch out for takeover targets
Mergers and Acquisitions (M&A) offer opportunities for both investors and traders. Companies often put a premium on any bid they make for a business in an attempt to win the support of shareholders, which provides an opportunity to profit once the bid is made.
If a stock is trading at 100 pence per share but is then subject to a takeover bid with a 25% premium, its share price will often jump to match the value of the bid, which in this case would be 125p.
An investor that holds a stock subject to a takeover bid has several options. They can sell the shares once the bid has been made to lock-in any profits that come from the subsequent rise in the price. If the offer is in cash, they can hold on to the shares and accept the deal. If the deal involves stock, then it could present a way of gaining exposure to the bidding company at a favourable rate.
For traders, M&A activity can inject some volatility into stocks. Going long can present the same opportunities presented to investors once a bid is made, generally pushing the share price higher. However, there are also other potential opportunities to look out for. Share prices can rise simply on rumours of a takeover and then fall back down again if nothing materialises, or they can plunge if the deal collapses or fails to pass regulatory hurdles – which could offer rewards for traders that have gone short on a stock.
Spotting M&A can be difficult but is not impossible. If an activist investor has started to build a stake in a business, then it could be an attempt to influence the company to spin-off areas of the business or seek to merge with a peer. Similarly, if a company owns a large stake in one of its rivals then that could also be a precursor to a full-blown takeover.
Some companies will openly put themselves up for sale if they are in trouble, while others will admit they are looking to acquire others to help expand their reach, product range of expertise. Some sectors are undergoing consolidation, which feeds high levels of M&A, such as the telecoms industry.
Notably, bidders can sometimes afford to put big premiums on a bid because the value of the stock has fallen so much. This means any temporary weakness in a target be a window of opportunity for a bidder.
How to buy and trade M&A stocks
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ITV: Liberty Global still on the radar
Rumours that British broadcaster ITV could be a potential takeover target have circled for years, bolstered by the fact other big players have been bought by overseas firms in recent years, such as US giant Comcast $39 billion acquisition of Sky in 2018.
The company is one of the UK’s mainstream traditional broadcasters, alongside the BBC, Channel 4 and Viacom-owned Channel 5, but it has also made an entry into the streaming market after launching the BritBox service in partnership with the BBC and others.
One of the main reasons ITV is seen as a likely takeover target is because Liberty Global, the European telecoms company that owns brands including Virgin Media, remains the second largest shareholder with a 9.9% stake. Liberty Global has cash after selling its operations in Germany, the Czech Republic, Hungary and Romania to Vodafone, but there have been reports that it is considering a bid for Spanish-language media outlet Univision, which could be an alternative to making a bid for ITV.
ITV is a unique UK business and its share price has fallen to its lowest level since late 2012, which could make it an attractive target for overseas buyers – especially considering the pound is not at its strongest against the likes of the dollar.
ASOS: Bestseller remains largest shareholder
While those buyers look less likely now, one company has been building its stake in the company for years. Bestseller AS, a clothing giant owned by the Holch Povlsen family with roots in Denmark, is by far the largest shareholder in ASOS with a 26.4% stake – not far off the 30% threshold that could trigger a mandatory takeover target.
Bestseller’s business is based around bringing independent brands under one roof. It already owns reputable brands like Jack & Jones and Y.A.S and has a sizeable online operation along with thousands of stores across the world.
The fact ASOS shares have plummeted over 64% since hitting their all-time high in March 2018 could provide an opportunity for any potential buyers.
Whitbread: a property portfolio at a bargain price?
Whitbread is a very different business today than it was a year ago after it sold-off Costa Coffee to Coca-Cola for £2.5 billion, much of which I returned to shareholders. That leaves it with the Premier Inn hotel chain and several eateries including Brewer’s Fayre and Beefeater.
Read more: Whitbread: life without Costa
Before Brexit, when uncertainty plagued UK stock valuations and the pound, foreign investors had a great opportunity to snap up UK assets at a bargain price and one hot area was property. UK pub chain Greene King was bought by Hong Kong’s richest man for £4.6 billion, including debt.
And, although it paid a 50% premium to the share price at the time, which understandably wooed investors, the company was undoubtedly sold-off on the cheap considering its property portfolio alone was valued at £4.5 billion just months beforehand – meaning its profitable and cash generative business was bought for as little as £100 million.
The argument that Whitbread could be a possible takeover target this year stems from the same argument. Whitbread shares have plunged since mid-February and have hit their lowest level since December 2016. That values Whitbread as a whole at just £4.6 billion.
But the company had its freehold property portfolio valued at £4.9 billion to £5.8 billion in 2018 and, although property prices will have moved since then, it is unlikely the valuation has dramatically changed. Premier Inn has long been seen as a target for a larger hotel chain, but Whitbread’s subdued valuation may raise its appeal to a wider pool of potential buyers.
Morrisons: could be a target for private equity or Amazon
Morrisons, the fourth largest supermarket chain in the UK, had to dispel rumours late last year when it said it was ‘pure speculation’ that it was on the cusp of receiving a takeover deal.
That was prompted by its house broker stating Morrisons had become a target following a steep fall in its share price and the drop in the pound, which made the firm’s low debt and property portfolio attractive to potential buyers.
Nothing came of it, but the case remains. About 85% of its property is freehold and its property, plant and equipment was valued at over £7 billion in early August 2019. Today, the entire company is valued at just £4.4 billion. That means Morrisons could still be on the radar of private equity firms, even if the opportunity now isn’t as good as it was last year.
Aside from that, Morrisons looks like the perfect company for any business looking to make a grand entry into the UK grocery market – and one big name is constantly tipped to launch a bid.
Morrisons has been working with ecommerce giant Amazon for some time and the relationship between the two was cemented last year. Amazon is unashamedly keen to enter the grocery market as well as build a network of physical retail outlets, demonstrated by its acquisition of Whole Foods and its big push into US groceries.
If Amazon was to do the same in the UK, there is little doubt that Morrisons would be the primary target. The fact Morrisons has a significant wholesale business and makes more of its own food than its rivals could raise the appeal of the supermarket.
Burberry: will it be the new target for a deal making industry?
M&A activity in the luxury goods sector has been heating up, and some believe fashion house Burberry could be next on the list for any larger peers looking to strike a deal. The latest headline deal was LVMH $16 billion acquisition of Tiffany's, which was its largest purchase ever. More recently, Kering and Moncler held talks over a potential merger late last year before being abandoned.
Burberry could find itself a target considering the industry is flush with cash and consolidating. The company has been in the crosshairs before after reports emerged that it had rejected several bids from US firm Coach in 2016. There have been suggestions that Kering could even make a bid after failing to snap-up Moncler which, at a value of $9.8 billion, isn’t far-off Burberry’s £6.4 billion.
Axalta: For Sale sign is up, but can it secure the value it wants?
Axalta, a major supplier of liquid and powder coatings, primarily to the automotive industry, is one of the more likely takeover targets in 2020. The company launched a strategic review of the business in the middle of 2019, including an invitation for any interested parties to make a bid for the business.
The search for a potential buyer has been fruitless so far but this appears to be because Axalta can’t secure the valuation it wants rather than a lack of interest. It has already held talks with Nippon Paint and Akzonobel, but couldn’t seem to reach terms with either of them.
In its latest quarterly update released at the end of January 2020, the company said there had been no developments but that the review was ongoing. ‘We do not have news on that front to share with you, but we will provide updates as warranted,’ Axalta said.
The sharp drop in Axalta’s share price since February, partly driven by the coronavirus-induced fears about slower global growth that has hammered stocks from around the world, has pushed its value to its lowest level since December 2018 – which could prompt potential bidders to pounce.
Hilton Grand Vacations: will all-time low share price reignite private equity interest?
Hilton Grand Vacations, which builds and operates holiday resorts and sells off its properties through timeshares, is in a similar position after launching a review, and possible sale of the business, last year. An exclusive report from Reuters said it was looking to take advantage of strong interest from private equity firms. That follows on from Marriott Vacations Worldwide, another timeshare operator, splashing out $4.7 billion on its peer ILG in 2018.
Buyout firm Apollo Global Management, which already owns a timeshare business named Diamond Resorts Holdings, was touted as one of the most likely buyers last year, but nothing appears to have materialised since then. News on a potential sale has gone quiet this year but weakness in the share price of Hilton Grand Vacations, which was spun-out of Hilton Worldwide Holdings in 2017, could reignite any potential interest. Shares have sunk to an all-time low this month, partly driven by a poor set of annual results for 2019 that showed a steep decline in revenue and net income.
GrubHub is one of the larger players in the US food delivery market but it has not managed to grow at the same rate as some of its competitors. According to a report released by tech firm Second Measure in February 2020, GrubHub has a 31% share of the market, not much higher than it had a year ago.
Meanwhile, competitor DoorDash has managed to significantly grow its slice of the pie to leapfrog GrubHub as the market leader with a 38% share. The other big players are Uber with 20% and Postmates at 10%.
The market is highly competitive, so much so that players including Amazon have pulled their own services. The market is expected to consolidate in the coming years as players vie for customers and strive to escape losses, and GrubHub is thought to be a potential target.
GrubHub denied reports late last year that it was exploring a sale. Any buyout would likely be by a competitor or a company looking to make a big entry into the market – Amazon’s own services have failed but it has retained interest in the space by investing large sums into the likes of UK delivery outfit Deliveroo.
BioMarin has been regarded as a takeover target for several years, partly because of the level of M&A activity that has been happening in the biotech and biopharma space in recent years, including Bristol Myers Squibb’s $74 billion takeover of Celgene and AbbVie’s $63 billion purchase of Allergan.
BioMarin develops and produces orphan drugs for rare diseases and already generates $1.7 billion in annual revenue from six drugs that are on the market, but it is loss-making.
Still, it has an attractive pipeline of drugs that, if given approval, could put it in the crosshairs of big pharma, including its gene therapy for people with haemophilia (which is ‘the first gene therapy product to be reviewed for the treatment of severe hemophilia A’).
A decision is expected to be made by US and European authorities this year. Orphan drugs are designed to treat diseases that only effect a minority of people, but they are often the only treatments available and offer a high margin for producers.
Big pharma is keen to expand its product portfolio but also their pipelines in new breakthrough areas, and BioMarin is one of many stocks that can help them achieve that.
UniQure is another gene therapy business that could be snapped-up. It is much smaller than BioMarin and generates minor revenue, but it again has a promising pipeline of drugs that could bring it to the attention of larger players. It says it expects to release top-line data for its ‘pivotal’ Phase III study for its treatment for hemophilia B by the end of 2020 and says ‘our primary goal is to advance this program for regulatory review and potential approval’.
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