After Shell, BG, Nokia and Alcatel, ITV and Indivior could join the takeover trail

IB Times Video Link:

Edmund Shing: After Shell, BG, Nokia and Alcatel, ITV and Indivior could join the takeover trail

KPMG says the merger and acquisition boom is back in 2015. Certainly, company takeover activity has been hotting up on both sides of the Atlantic these past few months – just think of Shell swallowing up BG in oil and gas, Nokia merging with Alcatel-Lucent in technology and FedEx buying up fellow Dutch logistics group TNT Express.

Figure 1. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook Survey Report

One of the main reasons for expecting more takeovers is the very high level of cash that large companies are holding, and the very low interest cost on company debt (Figure 1). With money burning a hole in corporate pockets, top executives want to go shopping for growth.

In trying to predict who could become the next takeover targets, we need to know the profiles of existing targets: which industries are seeing the greatest number of takeovers and takeover rumours, and what size of company is most likely to be susceptible to a takeover approach?

Technology, healthcare, media, insurance and oil and gas are ripe for consolidation

I see four industries as prime hunting grounds to search for potential takeover targets, given recent takeover and merger activity in recent months:

1. Technology: Nokia is merging with Alcatel-Lucent in telecoms equipment, while US set-top box maker Arris is buying UK set-top-box maker Pace for $2.1bn.
   
2. Healthcare: In generic drug making, Israeli global leader Teva has bid some $40bn in cash and shares for US generic drug rival Mylan. Novartis, the Swiss drug maker, has revealed recently that it is hunting for healthcare acquisition targets in the $2bn to $5bn range.
   
3. Media: AT&T's acquisition of DirectTV in the US and Liberty Global's purchase of Belgian media company De Vijver Media NV highlight the consolidation occurring in the US-dominated broadcast media industry, with media content becoming increasingly valuable to cable and TV distributors.
   
4. Insurance: Lloyd's of London insurers has been the focus for acquisition of late, with both Catlin and Brit Insurance bought up by larger North American insurers. We can also add the merger of close-end life assurer Friends Life with Aviva, highlighting the consolidation wave under way in insurance.

Interestingly, these same industries came top in the KPMG M&A survey too (Figure 2).

Figure 2. What factor will drive deal activity in 2015? 

Source: KPMG 2015 M&A Outlook  Survey Report

What size of company could be preferred for acquisition?

While the Shell-BG deal is huge buying up huge, mid-cap companies are generally more likely to become tasty bite-sized morsels for cash-rich mega cap rivals to buy up growth prospects, relatively easy to finance and without all the complications of combining two huge companies with wide-ranging and complicated operations.

Three potential UK mid-cap takeover targets

1 Indivior (Healthcare)

Indivior (UK code: INDV) is the former pharmaceutical division of cleaning products and food maker Reckitt Benckiser, spun off from Reckitt as an independent, UK-listed company at the end of 2014. Its principal focus is on medicines to treat drug dependency, most notably alcohol, heroin and cocaine addiction.

At a market capitalisation of £1.5bn, it is relatively small versus the UK industry giants GlaxoSmithKline, AstraZeneca and Shire. Furthermore, it remains substantially cheaper on a number of valuation ratios such as price/earnings than any of these larger drug companies. Potential acquirers could be larger US-based drug makers who already produce opioid addiction treatments – Actavis, Endo Health and Janssen Pharmaceuticals.

2 ITV (Media)

There has been a battle for broadcast media content globally in recent months, with persistent takeover rumours surrounding £11bn market capitalisation ITV (UK code: ITV). It has most recently popped up as a potential target for the likes of US cable operator giant Comcast, the largest company in the world by broadcasting and cable revenues.

These rumours have sent the TV share price, and thus valuation, rising substantially since November 2014, with ITV's jewel in the crown being its production arm ITV Studios, responsible for drama series such as Poldark.

3 Lancashire (Insurance)

Lancashire (UK code: LRE) provides "global specialty insurance", operating as a Lloyd's of London insurer like acquired competitors Catlin and Brit Insurance. Attractions include a low valuation, high profitability levels and a juicy dividend yield projected to be as high as 9.5% in the future.

Just like Catlin and Brit Insurance, Lancashire could be the next to fall prey to a US-based reinsurer looking to expand globally.

So these are three UK mid-cap gems that I like the look of from a fundamental basis, which could also become the subject of a share-price boosting takeover in the next few months.

Bloomberg TV Video: BG Group Shareholders Have Been Rescued by Shell

BCS Financial Group Global Equity Portfolio Manager Edmund Shing discusses both the outlook for European markets and Royal Dutch Shell’s acquisition of BG Group. He speaks with Guy Johnson on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Video Link below:

Bloomberg TV: BG Shareholders Rescued by RD Shell

TalkTalk may follow O2 and succumb to telecom takeover mania

International Business Times Article Link: Click Here to View

The airwaves have been awash of late with UK telecom takeover stories. Firstly Telefonica's UK mobile phone operator arm O2 is reportedly to be sold to Hong Kong billionaire Li Ka Shing's Hutchison Whampoa, the owner of the Three mobile phone network, for £10bn.

Figure 1a. UK Mobile Operators' Market Share: Current situation 

Source: Jeffries Investment Bank

O2 plus Three's combined UK mobile market share would rise to 40% from Three's current 12% share, easily becoming the UK's largest mobile operator (Figure 1a and b).

Figure 1b. UK Mobile Operators' Market Share: If O2 and Three are Merged 

Source: Jeffries Investment Bank

Secondly, both Deutsche Telekom and Orange are potentially ready to sell their combined UK mobile operation EE to BT, who is looking to buy its way back into the UK mobile network business some 13 years after selling its mobile arm BT Cellnet, which eventually turned into O2.

BT's potential purchase of EE fits with the predictions made by the credit ratings firm Standard & Poors, who expect to see more fixed-mobile combinations in the UK telecoms market as key players seek both revenue and cost synergies.

Vodafone the wallflower at the mobile phone party?

Looking at the four UK mobile phone incumbents, the only operator so far not mentioned in this merger and acquisition merry-go-round is the number three player ranked by customers, Vodafone.

Believe it or not, even at a total market capitalisation of nearly £64bn currently, mobile phone juggernaut Vodafone (LSE code: VOD) has been talked of as a potential acquisition target in the global telecoms sector, ever since it agreed to sell:

• its 50% share of US mobile operator Verizon Wireless back to Verizon for £54bn
• its 44% share in French mobile operator SFR back to majority holder Vivendi.

Who could afford to buy Vodafone? Two much larger suitors have been identified in the recent past: US telecoms giant AT&T and the leading Chinese mobile phone network, China Mobile. In terms both of market capitalisation and annual income generated, these two telecoms companies dwarf Vodafone (Figure 2a and b).

Figure 2a. Vodafone is dwarfed by China Mobile, AT&T

Source: Finviz, Stockopedia

Figure 2b. Vodafone is dwarfed by China Mobile, AT&T

Source: Finviz, Stockopedia

In fact, AT&T and China Mobile are not the only two potential suitors mentioned, as back in September last year Japanese conglomerate Softbank, the owner of Japanese mobile network Softbank Mobile (formerly Vodafone Japan) and US mobile network Sprint, was also earmarked as a potential bidder for Vodafone.

Vodafone as predator rather than prey

Given Vodafone's size, it would certainly be a huge undertaking for any acquirer to pursue. But as well as being a potential takeover target, Vodafone can also be seen as a potential acquirer itself in the rapidly consolidating UK telecoms market.

Indeed, Vodafone's CEO Vittorio Colao recently warned that were BT to move aggressively into the mobile telecoms space, then Vodafone would retaliate by moving into the consumer broadband business, where it has been thus far absent.

But how would it accomplish this strategic move, given that thus far in broadband it only serves business customers, after buying out Cable & Wireless's UK broadband network?

One potential target could be TalkTalk (LSE code TALK), one of the premier consumer broadband network operators, serving four million customers in the UK.

TalkTalk is today the fourth-largest broadband internet provider in the UK (Figure 3), achieved largely through offering very cheap combined "triple-play" offerings (broadband internet, telephone and television services).

TalkTalk CEO Dido Harding has even gone as far as to state that: 

"If [Vodafone] decides it simply has to quickly have a fixed-line asset, then I'm not naive enough to think that we're not one of the companies it would look at".

Figure 3. TalkTalk is the fourth-largest UK broadband internet provider
 

Source: Ofcom

Two potential takeover targets in UK telecoms to choose from

So there you have it – two ways to play ongoing consolidation in the UK telecoms sector: Vodafone and TalkTalk.

Note that Vodafone offers a juicy dividend yield of 4.8%, and TalkTalk is close behind with a prospective yield of 4.7%. Not bad dividends to pick up while you are waiting for a potential takeover.

Edmund Shing is the author of The Idle Investor (Harriman House), an expert columnist and a global equity fund manager at BCS AM. He holds a PhD in Artificial Intelligence.

Royal Dutch Shell and BP tie-up would ease the pain for oil and gas investors

IBTimes UK Article Link

IBTimes Video Link

Since July, the collapse in world oil prices has been the talk of global financial markets. Brent crude oil, the global benchmark, has fallen from $115 per barrel to under $69 today, a price not seen since 2009 (Figure 1).

1: Brent Crude Oil Back to Prices Not Seen In the Last 5 Years 

Source: Investing.com

This has been painful for investors holding oil and gas stocks such as Royal Dutch Shell (RDS) or BP, with Royal Dutch Shell shareholders nursing losses of 10% since June, and BP shareholders an even more painful 15% loss since June.

Merger and acquisition activity hots up in oil

There have been a number of consequences of this sharp oil price fall, one of which has been an increase in merger and acquisition activity in the global oil and gas sector.

For instance in oil services, Halliburton is in the process of taking over US rival Baker Hughes for $35bn. But perhaps the biggest potential takeover in this sector is still ahead of us...

Could Royal Dutch Shell buy BP?

This sounds ridiculous at first flush – after all, BP is a giant company worth over £136bn at its current 425p share price (as of 5 December). However, it is perhaps not such an outlandish notion upon reflection.

2: BP and Shell Share Prices Have Gone in Different Directions Since 2010 

Source: Yahoo Finance

First of all, at today's 425p BP (code: BP.L) languishes some 34% below its 640p share price reached in March 2010, before the Deepwater Horizon disaster in the Gulf of Mexico took place, costing BP $27bn dollars (so far) in clean-up costs and damages.

In sharp contrast, RDS's A shares (code: RDSA.L) have gained 13% from 1910p in March 2010 to 2149p now (Figure 2). 

As a direct result of this widening gap in relative share price performance, BP is now only worth 64% of the total market value of Royal Dutch Shell, down from almost level pegging back at the end of 2009 (Figure 3). 

3. BP's Market Capitalisation Now only 64% of Royal Dutch Shell's 

Source: Yahoo Finance

Are BP's shareholders fed up with Waiting for Godot?

We could well argue that BP's longstanding shareholders are becoming fed up of waiting for the company to regain the 640p level seen pre-disaster back in April 2010.

BP's sale of its share in the Russian TNK-BP joint venture in return for 20% of Russian oil company Rosneft is not proving a great success.

This stake is worth 38% less today than it was back in early July, thanks to a nasty combination of a falling Rosneft share price together with a collapse in the value of the Russian ruble on the back of international sanctions.

There has been increasing press speculation of late regarding a possible Royal Dutch Shell-BP tie-up, with a mooted £5 per share bid for BP equating to 16% more than Friday's closing share price, financed presumably by the issue of new Royal Dutch Shell shares.

The new Anglo-Dutch oil and gas combo would rank second by size in world oil and gas giants, only a fraction behind the US behemoth ExxonMobil (Figure 4).

4. The Largest Global Oil & Gas Companies

Source: Yahoo Finance. Note: RDS BP combination assumes £5 bid price for BP shares

Given that these large oil companies will find life less profitable in the future at these new, lower crude oil price levels, a cost-cutting (and profit-boosting) merger of these UK oil giants makes sense at present, as it would give the combined entity even greater global scale to compete for new projects. 

Worth mentioning too is that BP offers a juicy prospective dividend of over 6% - so you are paid to wait patiently! Even if a bid from RDS does not materialise, you should still benefit from an eventual rebound in oil prices as global demand grows, as crude oil prices have typically rebounded in the past after such sharp price declines!

Edmund

AstraZeneca gets a Pfizer boost

I highlighted the potential value in AstraZeneca (AZN.L) back in December of last year (AstraZeneca: why it should defy the bears and perform in the long term) when it sat at just above £36, pointing to excessive bearishness on the part of professional analysts and investors, and the potential for a revaluation of its pipeline of new drugs under development.

It seems from the weekend press (The Sunday Times reported a mooted $101bn bid for AstraZeneca by Pfizer) that the US drug giant Pfizer would agree, as Pfizer is reported to have been recently in talks with AstraZeneca to merge their two companies.

Such a deal would bring Pfizer further drugs under development in the field of cancer treatments (oncology) that use the body’s own immune system to attack cancer.

This has taken AstraZeneca up this morning back above the £40 price mark, close to the highs around £41 hit back in late February of this year (Figure 1).

1. ASTRAZENECA GETS A PFIZER BOOST

Source: Bigcharts.com

Not the only Pharma deal today

Note that merger & acquisition activity is firmly back on the stock market agenda today, with not only this Pfizer/AstraZeneca talk, but also a big deal taking place between the Swiss company Novartis and the UK’s GlaxoSmithKline, with Novartis buying Glaxo’s cancer business for as much as $16bn, with Glaxo buying Novartis’ vaccines business in return for just over $7bn.

So after a long period where there had been little such activity, it seems that M&A is back on the Healthcare sector’s menu.

Highlights the latent value in Astra

Just to remind you, AstraZeneca is still relatively good value, offering a dividend yield in excess of 4% at the current £40.49 share price. At a forecast 11x EV/EBITDA valuation ratio, Astra is no longer as cheap as it was back at the end of last year, but nevertheless could offer further upside should a deal with Pfizer finally materialise.