Takeover boon builds. Here's what to watch

Takeover offers for ASX-listed companies can be good news for shareholders in target companies, and asset managers expect more takeover bids for local companies this year. This month’s bid for telco Vocus Group (ASX: VOC) highlights the premium target companies can enjoy.

Subdued economic growth, a squeeze on profit margins and a low cost of capital make takeovers activity more likely as companies seek growth by joining with others.

Morningstar analyst Brian Han says with interest rates at historical lows, abundant liquidity and firepower among private equity firms keen to put their capital to use, “the likelihood of further M&A actions is high in 2021.”

“Those sectors which are still struggling with the ill effects of COVID, with earnings unlikely to recover to historical levels anytime soon, are probably the most fertile hunting ground for acquirers,” Han says.

In the latest takeover news, Asaleo Care (ASX: AHY) has received another offer from Swedish group Essity, the Australian Financial Review reported on Monday.

Asaleo Care reportedly agreed to open its books, and talks are afoot in an effort to secure a deal before the Aussie toilet paper and tampon company’s results on Wednesday, the AFR writes.

Asaleo rebuffed a previous offer late last year of $1.26 a share, but the AFR says it understands Essity has returned with a promise to try to lift its offer on the condition it could examine Asaleo’s financials.

At 11.30am on Monday, Asaleo was up 5.36 per cent, trading at $1.38.

It is 17 per cent overvalued, according to the $1.18 fair value estimate of Morningstar analyst Angus Hewitt. 

Another takeover target is Vocus Group (ASX: VOC), which in the past week received a tentative takeover bid from Macquarie Group’s Infrastructure and Real Assets Holdings (MIRA) for $5.50 a share on 8 February, reigniting the prospect of a bidding war for Vocus’ prized fibre networks. 

Vocus shares closed 12.8 per cent higher on the day, at $4.94, and have been trading around $5 since. The telco said it was in the best interests of its shareholders to explore a potential transaction and has granted MIRA due diligence to examine its books.

Vocus has been a target before. Private equity group EQT Infrastructure and AGL (ASX: AGL) both made tentative bids for Vocus in 2019 before walking away. Private equity groups Kohlberg Kravis Roberts and Affinity Partners also pitched bids in 2017,  but they walked away too.

Potential targets mooted by analysts

Other companies too could be in the eyes of private equity bidders. In the leisure and media sectors which Morningstar’s Han covers, Village Roadshow was recently bought out by private equity group BGH, “and there may be further opportunistic overtures for some media and leisure-related companies—ones that are mired in short-term pandemic-induced difficulties but boast sustainable business models longer term if/when conditions normalise.”

Morgans equity strategist Andrew Tang also expects greater mergers and acquisitions (M&A)

activity this year, particularly if equity markets continue to rise, as he expects.

“Factors driving our view include a low cost of borrowing, low structural underlying economic growth and a wide variation in asset price valuation, which makes growth by acquisition very attractive for market leaders looking to cement their position,” Tang says.

“We have seen a few recent examples of this in the Travel (Corporate Travel Management), Consumer (Coca-Cola (ASX: CCL), Lovisa Holdings (ASX: LOV)), Industrials (bid for in Bingo Industries (ASX: BIN)), Financials (bid for Link Administration ASX: LNK), Telco (Vocus).

“We see further acquisition activity likely in the infrastructure sector,” says Tang, noting Bingo Industries has received a takeover offer from CPE Capital, APA Group (ASX: APA) is looking to buy pipeline assets in the US and Transurban Group (ASX: TCL) has its eye on WestConnex.

Vocus Group has received a tentative takeover bid from Macquarie Group’s Infrastructure and Real Assets Holdings (MIRA)

Other analysts expect greater activity in the the funds administration space. Alex Shevelev, senior analyst at Forager Funds, sees Mainstream Group (ASX: MAI) and Link as potential takeover targets. “Mainstream has been performing very strongly despite the COVID disruption.

“Super admin business Link had fielded offers from private equity groups and SS&C Technology is an aggressive global acquirer. Fund administrator Onevue was acquired by financial technology player Iress in November at a 67 per cent premium to the pre-bid price. Given the recurring revenue, scale advantages and growth opportunities, it wouldn’t be surprising to see Mainstream end up in the same boat,” says Shevelev.

Morgans’ Tang says Challenger (ASX: CGF) could also attract interest from strategic holders and he also sees Mainstream’s increasing scale as potentially attracting the interest of global peers.

Emanuel Datt, chief investment officer with Datt Capital, says Hub24 would be an attractive bolt-on acquisition for Netwealth Group (ASX: NWL), “while Afterpay (ASX: APT) would be an extremely attractive acquisition for PayPal or other large global finance company while Selfwealth (ASX: SWF) is the fastest growing of the companies mentioned, and would be attractive for an off-shore acquirer.”

In the retail sector, Datt believes specialty fragrance retailer Dusk Group “is priced very cheaply for a growing retail business and would be an attractive private equity play while Myer (ASX: MYR) is well positioned and priced for further recovery in the retail sector.”

Another company that has attracted takeover speculation is fleet management business Eclipx.

“Two years ago, the company was dealing with approaches from both SG Fleet and McMillan Shakespeare. The suitors must have thought themselves lucky to miss out. Acquisitions by the old Eclipx management team soured and the business struggled under too much debt,” says Shevelev.

“A new team, led by CEO Julian Russell, then navigated the business through a radical process of asset sales, deleveraging and refocusing on the attractive fleet management segment … The case for consolidation among the fleet management and novated leasing players remains strong … Eclipx is more likely to be prey than predator.”

Turning to resources, “Musgrave Minerals would be a good acquisition target for Evolution Mining (ASX: EVN)—it is current a joint venture partner. Panoramic Resources would be a good acquisition for IGO (ASX: IGO) or Western Areas (ASX: WSA),” says Datt.

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