Which companies will be takeover targets?
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Christine St Anne is Morningstar's online editor.
The private equity bid for David Jones (DJS) turned into a fiasco, with the deal revealed to be a hoax. However, the bid did serve to highlight that some Australian companies could be ripe for the picking.
"The David Jones bid may have been a shambles, but it did highlight the fact there is some value in a number of these companies," Morningstar head of equity research Peter Warnes says.
Similarly, City Index chief market analyst Peter Esho says the bid for David Jones shows that domestic retail stocks are now in play, and merger and acquisition (M&A) strategies which were previously on the backburner will be brought forward.
Nevertheless, the first of half of 2012 was lacklustre when it came to M&A activity. This was to be expected, given the volatile and uncertain economic environment.
Warnes says many companies looking to acquire businesses were circumspect given the fundamentals in a number of target companies continued to deteriorate. He points to Billabong (BBG) as an example.
In February, the US-based private equity firm TGP Capital Partners made a bid for Billabong. The price of Billabong's shares at the time of the bid was around $3.30 per share. Within three to four months, the share price had fallen to around $1.
"If the bid was successful, the TGP acquisition would have been a wipe-out," Warnes says.
He says examples like the Billabong bid have made predators increasingly cautious.
"These companies are not working on the inside of the target companies they want to buy to do the relevant due diligence. They are, in a sense, operating in a vacuum," he says.
"That's why there has been less activity given the debilitating circumstances that a lot of these companies are finding themselves in. But, in a sense, this has caused the perfect storm," Warnes says.
"Where the predators are likely to go will be the wreckage. They will seek opportunities in the bottom of the market. Will companies look at Billabong again? I would say yes," he says.
According to Zurich Investments investment specialist, Angus Crennan, a strong pick-up in M&A activity commenced in the second quarter of 2012.
Crennan points to the iron ore sector as one area where such activity has picked up.
"In the M&A space, the greatest amount of activity over 2012 has occurred in the iron ore sector, with over three-quarters of bids coming from outside Australia," he says.
In March, Korea's SK Networks announced a $313-million investment in Cockatoo Coal (COK), although the bid was later abandoned.
Three months later, Australian gold producer St Barbara (SBM) announced the purchase of London-listed company Allied Gold Mining.
Warnes also expects more consolidation to occur in the resources sector, particularly from companies wanting to boost their reserves at a low cost.