8 POTENTIAL TARGETS TO WATCH

Mergers and acquisitions activity will be one of the key growth drivers for many cyclical businesses as companies move past the peak in our recovering economy in the next 12 to 18 months, according to Jun Bei Liu, Tribeca Investment Partners’ portfolio manager.

“At the larger to mid end of the market, we are expecting many businesses to change hands,” says Simon Brown, Tribeca’s portfolio manager.

Liu and Brown have picked eight companies that they regard as ripe for a takeover, and explain why.

LARGE CAPS PEXA Group (ASX: PXA)

The legal technology company Dye & Durham has PEXA in its sights, through an ownership bid for its major shareholder, the share registry and administration business Link Group. Pexa’s conveyancing platform would be synergistic with Dye & Durham’s GlobalX platform. Our view is that by owning Link, Dye & Durham will have access to around 42% of the stake in Pexa, therefore making a full takeover a credible possibility.

A2 Milk (A2M)

A2 Milk has gone through significant earnings challenges in the past couple of years as a result of Covid-related disruptions. Despite a challenged earnings trajectory, on-the-ground feedback in one of its largest markets, China, continues to support strong recognition of its premium label and stabilisation of the channel disruption. While its earnings are recovering, it has strong net cash on the balance sheet. It has been rumoured previously as a takeover target for Nestle or a Chinese domestic buyer.

Treasury Wine Estates (TWE)

Treasury is another premium label that has gone through a tough earnings period with Covid-19 disruption. It was also hit by the sharp hike in the Chinese tariff on the Australian wine sector, which in effect shut the Chinese channel a year ago. With great brand equity, Treasury was able to reallocate much of this Chinese volume to other Asian markets, and now has truly moved beyond the Chinese market. Trading on less than 20 times earnings multiple (which is less than the market’s), the company is displaying superior double-digit earnings growth that is expected to continue for the next few years. We believe this firmly positions the stock in the eyes of future global acquirers.

Tabcorp Holdings (TAH)

Tabcorp is going through a demerger of its $8 billion wagering/media and lottery businesses and this has received a lot of attention from other corporate buyers. Suggestions in the markets are that infrastructure investors Stonepeak, Brookfield and GIP are all expected to be interested in Tabcorp’s lotteries business after the demerger, and this makes it an interesting stock to watch.

SMALL CAPS

Smaller companies are often ignored and detailed research on these companies can uncover unrecognised value. Here are four to watch:

Eclipx Group (ECX); market cap $750m

Eclipx is a leader in vehicle fleet leasing, a sector where consolidation is expected and overdue. McMillan Shakespeare (MMS) and SG Fleet (SGF) made acquisition attempts in 2018, but walked away after Eclipx’s downgrades driven by non-core business units. The new management team has simplified the business and sold off all the non-core operations. Precedents highlight that there are plenty of cost synergies from consolidation in this space. Eclipx’s scale would provide a market-leading position for any potential acquirer in the sector, and its asset-backed funding structures would also provide a funding advantage. Eclipx is highly cash generative, with negligible debt providing plenty of balance sheet flexibility.

Praemium (PPS); market cap $345m

The investment platform was recently approached by its competitor, Netwealth (NWL), with an all-scrip acquisition proposal, which was initially rejected by the Praemium board on a valuation basis. The shares have subsequently materially underperformed, opening the way for a revised proposal, without the approval of the Praemium board if necessary. The independent platform space has seen plenty of consolidation in recent years, mostly driven by HUB24, as players race to gain an edge in scale and functionality. Praemium would provide an acquirer a market-leading tax and reporting engine, plus a well-established non-custody reporting business. Praemium recently agreed to sell its international operations to Morningstar for $65 million. Once the sale is completed in the next three months, it will leave behind a business with a significant net cash balance trading materially cheaper than Netwealth and HUB on all metrics.

Life360 (360); market cap $1070m

The family tracking app has a competitive advantage over Apple and Google in that it can be used over any operating system, whether it is IOS or Android. It recently purchased Bluetooth tracking device Tile for close to $300 million, but even before the acquisition Life360 was by far the dominant player globally in family safety, with 35 million monthly active users in 195 countries. The acquisition of Tile increases scale and broadens its product offering. This dominant market position and broad global reach could appeal to a large tech player.

Capitol Health (CAJ); market cap $364m

Capital owns a network of 63 community-based diagnostic imaging and related services in Victoria, South Australia, NSW and Tasmania. Its portfolio would be complementary with a number of other consolidators in the sector. Its valuation looks relatively cheap in light of recent transactions for a portfolio of Capitol’s scale.