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Takeover activity heats up, more to come

Nicki Bourlioufas  |  12 Feb 2018Text size  Decrease  Increase  |  
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Any further dips in share prices may make Australian companies cheaper for offshore buyers and promote more takeover activity, rather than deter it, with the prospect of higher interest rates potentially bringing forward private equity offers, according to one expert.

"If share prices move lower, and the money is still there, we could see more mergers and acquisitions (M&A) activity this year," says Peter Warnes, head of equities research at Morningstar.

"Liquidity is going to be sucked up and monetary policy is going to be tightened globally and interest rates are going up, so private equity may be getting in now ahead of any tightening in policy later this year," says Warnes, noting that US$3 trillion will be taken out of the global financial system in coming years, a huge amount which will force interest rates higher.

It's already been a busy year for takeovers. In a surprise announcement, Magellan Financial Group (ASX: MFG) this month revealed it is buying Airlie Funds Management and US-based fund manager Frontier Partners Group, with the two deals worth more than $120 million.

The takeovers will diversify and strengthen Magellan's retail funds management business in Australia and add significant focus to its institutional distribution activities in North America, the company said.

Morningstar's Warnes says further mergers in financial services is possible. "There is always something happening in financial services because it's all about scale, as it is in service industries."

In the healthcare sector, Sirtex Medical (ASX: SRX) recently agreed to a $1.6 billion takeover offer from US-based Varian Medical Systems, after receiving several takeover offers in late 2017.

Sirtex chief executive Andrew McLean said Varian's all-cash takeover offer of $28 for each Sirtex share was the highest bid. Some fund managers don't rule out another bid for Sirtex before the Varian deal is finalised in May.

Also in the healthcare space, European private equity firm Permira may be making a bid for Integral Diagnostics, according to media reports. Integral Diagnostics' (ASX: IDX) board this month recommended shareholders reject a cash-and-scrip takeover bid from competitor Capitol Health (ASX: CAJ), saying it undervalued the company.

Permira also recently took over Australian radiology company I-MED Radiology Network (I-MED), the largest provider of diagnostic imaging services in Australia, with more than 200 clinics and 4 million patient procedures every year. The value of that deal wasn't disclosed. And reflecting just how cashed up it is, Permira was reportedly an under bidder to Varian for Sirtex.

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One of Australia's own private equity firms, Pacific Equity Partners, has successfully bid for LifeHealthcare (ASX: LHC), offering a $3.75 cash per share deal this month, a healthy 46 per cent premium to the shares' previous close of $2.57 on 2 February just before the offer was announced.

In the energy sector, Morningstar's Warnes say Santos (ASX: STO) is potentially a takeover target. While Santos rejected Harbour Energy's $4.55 bid for the company last year, Harbour may have another crack at the company and if they don't, others may be interested in Santos, including Woodside (ASX: WPL), says Warnes.

"Now that Woodside is free of Shell as a shareholder, it could be a match made in heaven--Woodside and Santos, that would be a very good tie-up. It's possible, anything is possible. It just depends on the price."

Warnes adds that in the energy space, oil and gas are in high demand given ongoing global growth. He speculates that cashed-up Seven Group Holdings (ASX: SVW) may make a bid for Beach Energy (ASX: BPT), a company in which it is already the biggest shareholder.

In another energy takeover, gas junior AWE Limited (ASX: AWE) recently accepted a $602 million takeover bid from Japanese firm Mitsui, withdrawing its previous support for a rival offer from Mineral Resources (ASX: MIN).

AWE recently agreed to Mitsui's 95 cents a share bid after Mineral Resources failed to match its $526 million cash and scrip proposal with Mitsui's all-cash offer.

Another takeover target could be data centre operator NEXTDC (ASX: NXT), which saw its shares rise in early February. According to media reports, US private equity giant Blackstone is eyeing the company, as well as NEXTDC's listed property spin-off Asia Pacific Data Centres (ASX: AJD).

The Singaporean government investment vehicle Temasek is also reportedly eyeing the company, which has seen its shares hit an all-time high of $6.36 in early February, though they have since settled to around $6.05 with share markets cooling overall.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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