Top bid targets for 2017
Rather than destroy London's M&A market, the Brexit vote hoisted the For Sale sign above UK companies made cheap to foreign buyers by the collapse in the pound. It's a theme the analysts at Peel Hunt expect to accelerate through 2017, especially given improving global growth forecasts and receding pessimism around the UK economy.
Takeover activity in the UK topped $177 billion (£143 billion) in 2016, according to Thomson Reuters data. Yes, that's down from $395 billion the year before, but activity was skewed by some mega-mergers, and last year's number was well above the average for the five years up to 2015.
"Although interest rate expectations are rising, debt financing continues to be readily available and attractively priced and the rise in markets should provide ample opportunity for equity financing," says Charles Hall, head of research at Peel Hunt.
It's why the broker has scoured the stocks it covers, looking for likely takeover candidates.
Increased regulatory costs, competition and ambitions to broaden distribution and product capability have already triggered consolidation among the asset managers - Henderson (HGG) and Janus tied up last year. American managers are waiting to pounce, we're told, and Jupiter (JUP) could be on their shopping list.
Wealth managers have already attracted the attention of private equity firms, and Rathbones (RAT) recently bought Vision to give it a financial advisory arm. Expect more activity here, says Peel Hunt.
Government focus on the buy-to-let market and the Brexit vote will also likely hasten consolidation among the challenger banks and specialist lenders. Look for bolt-on acquisitions, too, where Secure Trust (STB) is tipped to be active.
"We would see Aldermore (ALD) as a candidate given the lower [return on equity] generated from a scaleable infrastructure," writes analyst Stuart Duncan.
It's not been a great year for healthcare M&A, but more attractive valuation multiples could change that
Buyers have already been eyeing up UK branded food companies, and oil palm producer MP Evans (MPE) has just fended off an aggressive bid from Malaysia.
"The agribusiness sector saw two major deals announced last year (ChemChina for Syngenta and Bayer for Monsanto), which demonstrates the value of embedded market positions and the long-term attractions of the sector," writes Hall.
"Genus (GNS) has similar characteristics with its position in pork and dairy and its investment in technology. The changing regulations regarding use of antibiotics is having a material impact in the US and providing ECO Animal Health (EAH) with a clear strategic opportunity. This will not have escaped the attention of industry majors who would have material synergies on an acquisition given the opportunity to bring distribution in-house."
It's not been a great 12 months for healthcare M&A, but more attractive valuation multiples could change that in 2017. Because price is likely to remain a big theme in the US drugs sector, despite Trump's less hawkish stance, Peel Hunt thinks firms need acquisitions to drive growth.
Watch Circassia (CIR), says analyst Amy Walker. "[It] trades at a deep discount to our 160p price target, which represents fair value and includes an estimated c£100 million cash on the balance sheet (December 2016E)."
"We believe the non-allergy business is an attractive strategic asset for other specialty respiratory players, and strategic bids could materialise post completion of the remaining large allergy trial in 2Q17."
Don't expect activity among the housebuilders – a major quoted firm has not been taken over since 2005-07 – although Chinese interest may be stirring. All the obvious targets among builders' merchants have been taken out, too, although perennial bid favourite SIG (SHI) is always linked with St Gobain.
"We don't see it happening but would not discount a move from an external player," says Clyde Lewis. "Home Depot/Lowes or Amazon (AMZN) look to add an extra dimension to their logistics offering either in the UK (in which case Travis (TPK) becomes interesting) or the US (in which case it's Wolseley (WOS)). There have been no suggestions of this being discussed but a step change in the "cost to serve" may offer something different."
After a period of heady consolidation in the gaming industry, some still want to do deals
It's game-on in the industrials sector, though. "With sterling trading where it is, we could argue that nearly every stock in the industrials sector looks vulnerable to approaches from foreign buyers," says Peel Hunt's three-man sector research team.
"Names that often crop up in this context include those undergoing some sort of recovery/ restructuring (Oxford Instruments (OXIG), for example), Weir (WEIR) in the context of mining and oil & gas supply chain consolidation, or the trophy assets that have always looked too expensive in the past (Rotork (ROR), Spirax-Sarco Engineering (SPX) and Victrex (VCT)). Anything looks possible in 2017."
Watch for more opportunistic M&A among Lloyds (LLOY) insurers. All the main quoted players are up for grabs, writes Andreas Van Embden, although Novae (NVA) is "more attractively priced" than Hiscox (HSX), Lancashire (LRE) or Beazley (BEZ).
After a period of heady consolidation in the gaming industry, Rank (RNK) still wants to do deals, although 88 Energy (88E) now looks like the best bet given its founders now own less than 50% of the business.
Media agencies like Huntsworth (HNT) could be active, and unique franchises such as YouGov (YOU), Next15 (NFC) and Ebiquity (EBQ) "could be of interest to predators where the ratings allow". But it's ITV where the real interest lies. If Sky (SKY) goes, it'll be the only large cap broadcaster in the UK.
"We consider it likely that ITV (ITV) – a producer-broadcaster, which has c23% viewing share in the UK TV market – is vulnerable to takeover at levels well ahead of the current valuation.," says analyst Malcolm Morgan. "Liberty Global (LBTYA), c9% shareholders, is one of a long list of ITV suitors (mainly from the US). In an on-demand Media environment, ITV's extensive production capabilities are also very valuable."
Among the miners, UK players are tipped to be buyers rather than prey, but things could pick up in the oil & gas sector.
"Companies that screen well and have a sensible mix of asset quality and balance sheet strength that could represent bid targets in 2017 include: Serica (SQZ), Faroe (FPM), Bowleven (BLVN), Gulf Keystone (GKP) and Africa Oil (TSX)," writes Peel Hunt's Werner Riding.
Elsewhere, the broker believes there's unlikely to be much to excite shareholders in UK quoted businesses, although keep an eye on the infrastructure industry. "The UK government's clear commitment to increased infrastructure investment may tempt an overseas contractor to establish a meaningful presence in the UK," speculates Peel Hunt.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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