Take a punt and profit from M&A recovery
FOLLOWING a dearth of mergers and acquisitions (M&A) activity in the wake of the financial crisis, returning confidence and cash to credit-constrained companies has seen a flurry of deals and bids over the past month.
Yesterday, Stagecoach made a fresh all-share offer for its beleaguered rival National Express despite a consortium walking away from takeover talks last Friday, which saw the share price sink 23 per cent. But yesterday’s news boosted National Express’s share price by more than 10 per cent to 400p – the company had said that it would have to tap shareholders for more cash if no deal emerged.
And last week, fresh rumours emerged that the Qatari Investment Authority was once again targeting J Sainsbury as a potential acquisition, sending the supermarket’s shares soaring to 370p in very heavy trading.
Taking a punt on potential M&A activity is always a risky business for contracts for difference (CFDs) traders – just ask seasoned property entrepreneur Robert Tchenguiz. He lost up to £200m in 2007 after the Qatari Investment Authority’s takeover talks with Sainsbury’s collapsed.
But more stable markets mean that firms are now feeling much more confident about their own future and that potential targets can be much more realistically assessed. And with plenty of talk of M&A activity in the market, CFD traders can try to get ahead of the game and select stocks that could be potential takeover targets over the next six months or so. Typically, CFDs are held for longer than spread bets and are used more frequently to build up portfolios, so they are ideal for anticipating deals.
So which stocks could be on the cards for takeover activity and what could be the impact on their share prices? Well, CFD traders that are savvy, and lucky enough, to pick the right stocks can make a killing from M&A spotting. Historically, target stocks will see their share prices rise on the back of a bid, and some can see double-digit gains on the back of takeover announcements as investors seek to price in the bid premium.
Although selecting the right stocks might seem as easy as finding a needle in a haystack, there are a couple of ways of narrowing down your search. One possibility is to look at failed M&A deals from the past that could resurface – Sainsbury’s being a case in point.
TAKEOVER TARGET
And Ronnie Chopra, chief market strategist at CFD-provider Falcon Securities, thinks that Sainsbury’s is likely to remain a takeover target in the near future. “With sterling at near parity against the euro, there could even be an opportunistic bid from French Carrefour or German discount food retailers Aldi or Lidl.”
He adds: “With property prices rising and Sainsbury’s defensive qualities and excellent cashflow, it is only a matter of time before someone pounces while the share price remains so low at around 330p.” Back in 2007, somewhere between 600 and 650p was being touted as the takeover price.
Chopra believes that US food giant Kraft’s takeover interest in UK confectioner Cadbury highlights the attractiveness of businesses that are seen to be less affected by the recession, and which have strong cash generation, low debt and growth prospects.
Another sector that is looking ripe for M&A activity at the moment is the resource sector, says Alastair McCaig, senior derivatives trader at WorldSpreads.
He says: “The larger mining companies have cut back pretty aggressively over the last two to three years and to maintain their status quo they need to keep supplying their own resources. But they haven’t been going out and finding fresh resources so they will be looking at the more junior mining companies.”
With gold at historic highs and silver also doing well, mines that may not have been profitable a few years ago are now realistically looking like good propositions, and acquisitions.
There are plenty of mining stocks listed on the junior AIM market and McCaig thinks these could appear attractive to mining giants such as BHP Billiton and Rio Tinto. When selecting an AIM-listed potential target, McCaig says that CFD traders should look for stocks with a bit of liquidity that can actually be traded using CFDs – providers usually require a market capitalisation of at least £50m to consider it – and ideally, one that has some cash on its books and is therefore not looking to come back to the market in the near future.
With companies that are actually proving what they say they have got in the ground with hard figures, he adds that it will only be a matter of time before one of the majors comes sniffing around. If this happens and the market price doubles – not an impossibility with growth stocks – then McCaig recommends taking half of your profit off the table so that you effectively have a free trade.
Growing confidence in the market will only serve to boost M&A activity so CFD traders should be looking closely at potential takeovers in anticipation of volatility and profits.