Six names in the takeover frame as Schneider and AVEVA try again

Bids this year for FTSE 100 firms Worldpay, Sky and Unilever, as well as mid-cap names such as Berendsen, Paysafe, Jimmy Choo, Cape, Novae and now a third attempt by France’s Schneider to strike a complex merger deal with AVEVA, all suggest that the pound’s plunge over the past year means UK-quoted companies still look attractive to potential overseas predators.
5 September 2017

The pound is down by 15% against a trade-weighted basket of currencies since the June 2016 EU referendum, according to Bank of England data, a trend which makes UK-based assets and UK-quoted firms cheaper for overseas buyers.

Russ Mould, investment director at AJ Bell, looks at six companies that could all become a takeover target in the coming months given their competitive position, the rarity of the assets they control, their balance sheets, their shareholder structure, the nature of the industry in which they work and the valuations they currently command:

  • Burberry reportedly fended off an approach from America’s Coach in late 2016. A bid offer would be no surprise in some ways, given Burberry’s iconic brand, fat profit margins and the wave of consolidation which continues to sweep the luxury goods industry. However, the shares have advanced strongly this year and shareholders are probably going to be willing to give new chief executive Marco Gobbetti some time to stamp his authority on the company.”

  • “Shares in mining services specialist Capital Drilling have been badly holed this year as the Tanzanian government has imposed an export ban on unprocessed metal ores to try and squeeze more cash out of foreign mining companies. Two of Capital Drilling’s biggest customers have been affected and their mines disrupted, partly contributing to lowered guidance for both revenues and dividends.”

  • “Yet the plunge from nearly 65p to barely 40p could prove overdone. Two of Capital Drilling’s Tanzanian contracts relate to mines unaffected by the new rules and the firm is still very busy in Mauritania, Mali and Egypt. The company’s balance sheet is net cash, rig utilisation rates are still high and the consensus analysts’ forecasts suggest the valuation is low enough to potentially tempt a predator.”

  • ITV has an unrivalled position in the UK free-to-air broadcast arena with its ability to attract mass market audience and blossoming content catalogue. The 9.9% stake held by Liberty Global, the US-based owner of Virgin Media, means talk of a bid will never be far away and fears over a post-Brexit advertising slowdown continue to weight on the shares which have fallen by 30% in sterling terms since May.”

  • “FTSE 250 firms Spectris and Renishaw, both leaders in precision instruments with good long-term growth records. In the latter case chief executive and chairman David McMurtry and deputy chairman David Deer are in their late seventies and they own nearly half of the stock, although it would be unwise to expect them to sell to anyone who comes knocking – the company’s history shows a strong culture and management has always worked hard to keep jobs rather than cut them during cyclical downturns, so staff welfare will be a high priority.”

  • “Palm oil plantation firm MP Evans rejected a 640p-per-share offer from Malaysia’s KLK just before Christmas and there has to be a chance that the suitor will return at some stage, especially as an investment by MP Evans in a new project in Indonesia adds to its crop growth potential and strategic attractions.”

“Today’s 28% surge in AVEVA’s share price shows how investors’ portfolios can benefit, especially as shareholders in the Cambridge firm will also receive a cash windfall of more than £10 a share if and when the Schneider deal completes.

“However, buying a stock purely on hopes for a bid can be a dangerous (and expensive) game, as Unilever’s rejection of the 3G-Kraft approach, the regulatory obstacles which still confront the Fox-Sky deal and two prior failed attempts to bring Schneider and AVEVA together all suggest.

“In addition, a would-be buyer will want to get a bargain, so they may wait for a short-term blip or problem to develop before lunging.

“As a result, bids can take a lot longer to come along than many investors think – assuming they do at all (RSA has been a rumoured bid candidate for more than a decade and when an approach finally came, from Zurich in 2015, management sent the Swiss firm packing).

“Any potential “bid candidate” play in a portfolio must therefore still meet all of the investor’s initial screens, so it is fits with their overall investment strategy, time horizon, target returns and appetite for risk. Investors must feel the firm is a good pick in its own right – and any bid will therefore simply be a bonus.”

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