FIVE COMPANIES THAT COULD BE TAKEOVER TARGETS.

And if not, these companies still a good investment

There has been lots of takeover action in the Canadian small/ mid cap space over the past two weeks. We have had a privatization offer for AGT Food Ingredients, a Brookfield takeover of Enercare, and the near-daily overtures towards Aimia Inc. So, that got us thinking, what other takeover candidates are out there? Let’s take a look at five companies that might be in an acquirer’s sights one day, either for valuation or strategic reasons.

METHANEX (MX ON TSX)

Methanex is one of the world’s leading producers of methanol. So much so that it is often a price maker with the ability to turn supply on and off in order to stabilize prices. Business is good, its stock is up more than 60 per cent in the past year. Earnings per share are expected to quadruple from 2015 numbers to 2019 estimates. It has a decent balance sheet, is buying back stock, and yet trades for just nine times’ earnings. It was a rumoured target of CF Industries (CF on NYSE) earlier this year. From a valuation perspective, it certainly would make sense for CF to buy Methanex. Its shares trade at 46X times’ earnings, more than five times Methanex’s valuation. Based on that difference, a takeover would be highly accretive to CF.

STINGRAY DIGITAL (RAY.A ON TSX)

RAY trades at 13 times’ forward earnings, a low valuation despite having a decent balance sheet and solid growth prospects. Earnings per share are expected to double this year. Revenue has grown every year since 2013. Insiders have been net buyers this year. It is a bit of a misunderstood company. It provides music and media services to 400 million customers in 156 countries. As the music industry transforms, one of the other huge music companies might one day be interested in expanding its own offerings by buying Stingray. Stingray itself just made a big acquisition of Newfoundland Capital, getting it into the broadcast radio market

GOEASY (GSY ON TSX)

This is a pure valuation call. Even with a 17 per cent gain so far this year, GSY shares trade at just 11 times’ earnings. That valuation might be acceptable for a boring, slow-growth company, but GSY revenue grew 22 per cent last quarter, as did operating income. Its easyfinancial division showed 35 per cent growth. It released preliminary data recently, indicating its loan book grew 61 per cent in the second quarter (it reports Aug. 7). Insiders own 6 per cent and have been net buyers of stock this year. It might be a good target for a bank or an alternative lender, or one of those fancy new fintech companies with ridiculously high comparative valuations.

THE STARS GROUP (TSGI ON TSX)

Stars had fortunate timing this year, making a huge acquisition in the sports betting sector just as the U.S. declared sports betting legal again (more or less). This fortuitous timing has seen the stock rise 46 per cent this year, but that only brings it to 14 times’ forward earnings. Meanwhile, earnings per share are expected to double this year. The company has been shopped before, but the grey legal area of internet gambling likely reduced the size of the buyers’ pool. Now, it is a world leader in an industry that is opening up around the globe. We think either the stock goes up more, or it gets bought.

TAKEOVERS ARE NOTORIOUSLY DIFFICULT TO CALL.

GLUSKIN SHEFF & ASSOCIATES (GS ON TSX)

Gluskin has also been up for sale in the past. A highnet-worth money manager, it too trades at 13X earnings. Sure, there is not huge growth here, and it is in the financial services industry, which no one likes right now. But GS has $54 million in cash, is very profitable, and manages more than $9 billion in assets. It pays out huge dividends, more than $270 million in the past five years. A takeover — or privatization — would allow the buyer to keep all of the future cash flow to themselves, rather than sharing it with the public through dividends. Insiders own 9.5 per cent and have been net buyers of stock in 2018. Banks continue to consolidate the wealth management industry, and, at the right price, are sure to be interested in GS one day.

Takeovers are notoriously difficult to call. One reason we like the five above is that they are all decent companies anyway, regardless of any potential merger activity. If a takeover happens, you will get a ‘faster’ investment return, but over time we think the shares of these companies are likely to do well enough on their own, anyway.