How investors have fared in five recent takeovers
Most investors are generally pretty happy when one of their companies receives a takeover offer. Most of the time (although not always) a takeover includes a nice premium as the buyer pays up to take control of a public company and get access to its cash flow.
However, takeovers also force decisions from investors. Do you sell on the first takeover announcement? Do you wait for, perhaps, a higher bid or a competing bid from a third party? Do you tender to the offer or reject it? And, in a cash and stock deal, do you opt for shares in the acquiring company or cold hard cash?
Let’s look at the latter: In most stock/cash deals, there is a “cap” on the amount of cash the acquiring company wants to spend. After all, exchanging shares for shares puts no new financial burden on the acquiring company. But, most investors opt for as much cash as possible. They want to be in control here. If the combined company looks like a good investment, they can always purchase more shares later. So, in a takeover that is both cash and stock, it is a good bet that you are going to get some of each. Now, you need to decide whether to keep your new shares. You liked the old company (hopefully! That’s why you owned it!) and now you need to decide if the merged company is just as good. Let’s look at five recent transactions and see how things have turned out for shareholders who owned the target company:
ALTERRA ENERGY (AXY)
Alterra was acquired by Innergex Renewal Energy (INE on TSX) with the deal announcement on Oct. 30, 2017. AXY shares were exchanged for 0.5563 shares of INE. The announced premium was 59 per cent. But since the announcement date, INE shares have gone from $14.73 to $13.38, for a loss of nine per cent. But we would attribute this more to sector declines rather than anything company specific. Analysts still expect decent earnings growth this year.
SAVANNA ENERGY SERVICES (SVY)
In a hotly contested, often hostile deal, Total Energy Services Inc. (TOT on TSX) finally acquired Savanna in November 2017. At the time of the first amended bid much earlier in the year, the premium was in the 50-per-cent range. SVY shares were exchanged into 0.13 TOT shares. But, since the announcement, TOT shares have gone from $14.95 to $13.80, for a loss of 8.3 per cent. That’s not bad considering the meltdown in the energy sector over the past little while. TOT now has a high debt load, but analysts expected a big rebound in earnings, partly due to the Savanna deal.
PROGRESSIVE WASTE SOLUTIONS (BIN)
Progressive was acquired in 2016 by Waste Connections, a U.S. company (WCN on TSX and NYSE). Investors loved the deal, even though the initial announced premium was low. But Waste Connections stock surged on the announcement, providing an even better lift for BIN shareholders. Effectively it was a 1:1 stock exchange. This one has worked out very well for BIN shareholders. Shares of WCN have gone from $46.83 on the day of the announcement (adjusted for share splits) to $90.86 today, for a gain of 94 per cent since the deal was announced. Growth in the 25-per-cent range is expected.
IMVESCOR RESTAURANT GROUP (IRG ON TSX)
A more recent transaction, not yet closed (any day now). MTY Food Group (MTY on TSX) agreed to buy IRG for 0.0626 shares and 83 cents cash. The announcement effectively did not move the stock at all, as the premium was very low. Since the announcement, MTY shares are down about two per cent. It has been buying all sorts of restaurant companies and investors are a bit wary of it (down nine per cent for the year). But we like MTY. Per-share earnings have grown every year since 2010.
METTRUM HEALTH (MT)
Mettrum, in the emerging marijuana sector, was bought by Canopy Growth (WEED on TSX) with the first announcement in December 2016. In a 100-per-cent stock deal, investors did not have a cash option with this one. The initial premium on the takeover was 34 per cent. MT shares were exchanged for 0.7132 WEED shares. Canopy shares, $11.35 at the time of the first announcement, are now $27.35, for a gain of 140 per cent for MT shareholders, beyond the initial pop on the takeover. Gains of course were helped by the hot marijuana sector, further boosted when Constellation Brands decided to buy 10 per cent of Canopy not that long ago.
Generally, a good rule to follow in a takeover is the 1/3, 1/3, 1/3 rule: Sell one-third of your position on the first announcement, sell another third into the “next” announcement (i.e. a higher bid, or a bid from another company) and then tender the final third into the final offer. Of course, this assumes you do not want shares in the new company (when it is a stock deal). It is of course important to evaluate how the “new” company might fare. Selling too early potentially leaves you with a big lost opportunity. Since you liked the company that is being acquired, is it that much of a surprise that others do? Keep this in mind before you sell too early into a deal.