Thursday, 9 March 2023

CRITERION: The ASX takeover targets whose furious paddling is attracting all the sharks

by Berkeley Lovelace

It’s still early days, but 2023 is emerging as the year of the takeover as cashed-up predators smell the blood of wilted valuations in the water.

So far, most of the big-ticket action has been in the resources sector, most recently with Newmont’s mega offer for Newcrest Mining (NCM), the biggest ASX-listed gold producer.

Canada’s Brookfield Asset Management and EIG Partners have lobbed a $18 billion offer for Origin Energy (ASX:ORG), having earlier teamed up with Michael Cannon-Brookes for a spicy tilt at AGL Energy (ASX:AGL).

Meanwhile, the $10 billion agreed takeover of copper producer OZ Minerals (ASX:OZL) by BHP (ASX:BHP) is done-and-dusted.

Takeover activity is also creeping into the small cap sector, notably among the battered tech stocks. Those currently under offer include ReadyTech (ASX:RDY), MSL Solutions (ASX:MSL) and Nitro Software (ASX:NTO), which on Thursday chose Potentia Capital as its preferred bidder over rival suitor Alludo.

Last year, broadband operator Uniti Group was subsumed by Brookfield (that name again) and NZ’s Morrison & Co for $3.65 billion. And last week Elmo Software was removed from the ASX boards after gobbled up by the cutely-monikered Cookie Monster Acquire Co (a.k.a. K1 Investment Management).

In what looks like one from the private equity handbook, Allegro Funds has lobbed an agreed off-market, $150 million offer for Slater & Gordon (ASX:SGH), the underdogs’ law firm that never recovered from its disastrous UK expansion.

Who’s next?

There’s a long list of obvious or logical targets, but most mergers that are made in heaven fall down in the due diligence stage, or are cruelled by competition rules.

When they do happen, the timing tends to be out of the blue. For instance, the BHP-OZ Minerals tie up had been vaunted for years, so why didn’t BHP swoop two years ago when OZ shares were trading at one-quarter of the offer price?

Other vaunted targets are characterised by predictable cash flows and hard-to-replicate assets. An exemplar is arguably the most boring stock on the bourse, gas pipeline operator APA Group (ASX:APA).

Broker Wilsons nominates Queensland coal-hauler Aurizon (ASX:AZJ), if only because the public market shuns such ESG-unfriendly stocks.

Stock picker Forager Funds reckons the healthcare sector is ripe for picking, given its economic resilience.

Chief Forager Steve Johnson picks Integral Diagnostics (ASX:IDX), which looks cheaper than the private PRP Diagnostic Imaging recently acquired by IFM Investors and UniSuper.

For our two bob’s worth, Transurban (ASX:TCL) looks a no brainer for a long-term investor such as a super fund, because its monopoly assets can’t be replicated and its tolls are linked to inflation.

We’ll also keep a weather eye on Star Entertainment (ASX:SGR), given the equally troubled Crown Resorts was taken over by Blackstone for $9 billion cash.

In the retail sector, will the Solomon Lew camp finally make a tilt at Myer Holdings (ASX:MYR), having crept up to 25.7 per cent of the department store’s register? After all, he’s been talking about Myer’s failings for long enough.

Myer certainly isn’t the only takeover target that is cheaper than it used to be.

Wilson’s cites one such “de-rated” opportunity as cloud business accounting leader Xero (ASX:XRO), which has lost half its value from its November 2021 peak.

A de facto property trust, data centre owner Next DC (ASX:NXT) taps the insatiable demand for cloud storage.

In the gold sector the proposed Newmont-Newcrest union is unlikely to be the last, with the hitherto acquisitive Northern Star Resources (ASX:NST) vaunted to be on the other side of the ledger after a rough couple of years.

As we said, the chances are these takeovers won’t happen. Still, such M&A hit lists are a useful guide as to where the hidden value might lie, especially in the current market that looks more unforgiving by the day.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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