Sunday 4 December 2016

Seven magnificent candidates ripe for a takeover as acquisitions activity hots up

John Dorfman

Published 16/06/2011 | 05:00

PICKING takeover candidates for fun and profit is a perennial investment sport.

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How can it not be? When one company takes over another, it typically pays a 20pc to 70pc premium over the target's prevailing stock price. Takeovers can enrich investors instantly.

According to Bloomberg's database, there were 2,061 deals announced in the first quarter. The dollar volume of $269bn (€186bn) was more than in any of the previous nine quarters.

In the second quarter so far, the average takeover premium has been unusually rich -- 61pc, the highest in 12 years.

I don't expect that lofty figure to last. Premiums will probably revert to a more normal range of 30pc to 45pc. The good news is that I expect a continuing flow of deals in 2011 and 2012.

Last October, when merger and acquisitions started to resume after a recession-induced freeze, I wrote a column mentioning nine stocks that I thought could become takeover candidates.

As a group, through May 4, their performance has trailed one percentage point behind the 19pc total return in the Standard & Poor's 500 Index.

I prefer to judge stock picks based on a time frame of one year or more. Yet I'm doing a new takeover-candidates list now because M&A activity is heating up.

To find a new crop of candidates, I am using the following set of criteria, modified slightly from those of six months ago.

•US-based companies with a market value of $500m to $5bn.

•Enterprise value (the combined value of a company's stock and debt) divided by Ebitda (earnings before interest, taxes, depreciation and amortisation) of five or less. This EV/Ebitda ratio is often used by companies scouting for acquisitions.

•Total debt no more than 75pc of shareholders'

equity (corporate net worth, or assets minus liabilities).

•Cash or safe short-term investments of $75m or more.

•Stock price no more than 1.5 times the company's sales.

When I ran this screen recently, only 39 companies met all the criteria.

Here are seven that look to me like they have takeover allure, and should be decent investments even if no suitor calls.

The largest, with a market value of $4.9bn, is Coventry Health Care of Bethesda, Maryland. Selling for only 1.15 times book value, I think it is alluring bait.

The second is GameStop -- the world's largest video game and entertainment software retailer, according to its website.

Its stock peaked at more than $63 in late 2007, and sells for a little more than $25 now.

With GameStop shares fetching less than 10 times earnings and 1.3 times book value, it appears to me to be a potential magnet to buyers.

Third is Chicago-based Telephone & Data Systems, the parent of US Cellular, has a market value of $3.3bn. At a time when AT&T is trying to acquire T-Mobile USA for about $39bn, it's not hard to imagine this company giving up its independence.

With the US defence budget under pressure, mergers may pick up among defence contractors.

Oshkosh, which makes military transport vehicles and specialty trucks such as fire engines and cement mixers, could be picked off by a larger competitor. The company's stock languishes at five times earnings.

Seacor Holdings transports men and material to and from offshore oil platforms.

Selling for about 1.2 times book value, it could probably be acquired for less than $3bn.

In the semiconductor-equipment industry, I favour Kulicke & Soffa Industries Inc. At five times earnings, it strikes me as a very cheap stock.

One more candidate is RadioShack Corp.

It earned $1.84 a share in 2000 and $1.68 a share in 2010. A larger retailer could probably milk more growth and profitability out of this well-known brand.

John Dorfman is chairman of Thunderstorm Capital in Boston

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