The New Criterion: who are the next takeover targets?

The takeover activity at the top end of town is permeating down to the small to mid-sized sector, raising the perennial question of who might be next to garner interest from cashed-up or merely opportunistic acquirers.

With dollars to spare, private equity features strongly in the takeover activity to date. For instance, Canada’s Brookfield Asset Management paid $4.4 billion for Healthscope and also teamed with Infratil to buy Vodafone NZ.

KKR mopped up MYOB, Affinity Private Equity acquired lender Scottish Pacific while TPG took out veterinary and pet retailer Greencross.

According to Refinitive (formerly Thomson Reuters), Australian M&A activity (both inbound and domestic) stood at $US47.9 billion ($71bn) as at the end of May, the highest year-to-date rally since 2015.

A key driver is the abundance of cheap money, especially from offshore. Add a modicum of confidence and an M&A trickle can easily become a full-blown spree, especially when cautious boards see that their rivals are acting first.

In the resources sector, animal spirits were ignited by Wesfarmers’ tilt at rare earths producer Lynas Corp (LYC, $2.73) and then its play for lithium hopeful Kidman Resources (KDR, $1.88).

Wesfarmers looks to have given up its Lynas tilt – at least it won’t raise its overbid $2.25 a share offer – but its Kidman bid is yet to run its course.

Wesfarmers’ interest may well be a ‘special situation’, given the conglomerate’s growth imperative after divesting Coles (and coal). But that hasn’t stopped punters from making sideways glances at the likes of rare earths producer Arafura Resources (ARU, 9.9c), or WA lithium and tantalum developer Pilbara Minerals (PLS, 68c).

In the industrial sector, a rash of left-field activity has spurred expectations of further M&A. But given the under-researched nature of the smaller stocks, it’s especially hard to know where predators will strike.

In the ‘done and dusted’ category, AP Eagers has seized control of fellow care dealer Automotive Holdings Group, while IPH Ltd is in the process of subsuming intellectual property rival Xenith IP Group after its quarry tried to merge with Qantm Intellectual Property.

Last month electrical products maker Legend Corporation (LGD, 37c) fielded an agreed $80 million offer from another private equiteer, Adamantem Capital. But over at Yowie Group (YOW, 6.7c), the chocolate bar maker isn’t exactly giving in without a yowl after the unlisted Aurora Dividend Income Trust launched a “highly opportunistic” bid.

Telcos – or more precisely, telco infrastructure plays – continue to dial up acquisitive interest.

The owner of an extensive submarine fibre optic network, Superloop (SLC, $1.55) fielded two offers from QIC Private Capital, but the offer was abandoned. Vocus (VOC, $4.17) is now fielding its fourth takeover offer with AGL Energy entering the race after EQT Group’s exit.

Speaking of EQT, the private equity group also has co-bid more than $US8bn for US network owner Zayo and, locally, acquirers are also eyeing satellite services provider Speedcast International (SDA, $3.76). Well, they’re rumoured to be, anyway.

Property also looks interesting, given the surging post-election confidence after the negative gearing and CGT bogeys were put to bed (for the time being at least).

Last year Investa Office and Gateway Lifestyle vacated the bourse, having been taken over by Oxford Properties and Hometown America respectively. Charter Hall (CHC, $11.17) also subsumed fellow property trust Folkestone. In cahoots with Abacus Property (ABP, $4.23), Charter Hall has acquired 19.9 per cent of the Australian Unity Office Fund (AOF, $2.95) and launched a takeover.

Meanwhile, Queensland-centric Villa World (VLW, $2.27) has recommended a revised offer from the private Avid Property Group. That leaves speculative types to ponder the fortune of smaller ASX developers Cedar Woods Property (CWP, $5.73) and Peet Ltd (PPC, $1.22), which both trade at subdued – albeit recently improved – levels.

The back-room providers of tech services to the financial sector may provoke a stifled yawn or two, but they could attract M&A interest as the non-aligned advisory sector grows post the banking royal commission.

The provider of administration and transaction processing software for wealth managers, GBST Holdings (GBT, $2.63) is mulling a $170m cash-scrip tilt from Bravura Solutions (BVS, $5.15).

Investment platform providers HUB24 (HUB, $13.19), Netwealth (NWL, $9.29), Praemium (PPS, 35c) and Xplore Wealth (XPL, 10c) are also worth keeping an eye on, especially the former two which are much smaller.

The health and biotech sectors remain of perennial acquisitive interest.

In the diagnostic imaging space, Integral Diagnostics (IDX, $3) early last year rejected a takeover advance from the smaller Capitol Health (CAJ, 23c). With the anticipated funding help from Labor’s promise to pay for more MRI cancer scans failing to materialise, both stocks could be of acquisitive interest.

In the cannabis sector, Creso Pharma (CPH, 48.5c) has received a $122m scrip offer from Canada’s PharmaCielo.

Macquarie Research notes that completed M&A to the year to June 2019 accounted for a mere 2 percent of the ASX300 index, with pending deals involving a mere 1.4 per cent. As always, picking potential targets is one thing but identifying the actual ones is a harder thing altogether.

Volpara Health Technologies (VHT, $1.79)

Acquisitions are not one-way incoming traffic, with the breast imaging play buying a US rival MRS Systems for $21 million and thus snaring a circa 25 percent share of the market.

Taking advantage of its share strength, Volpara has raised at least $50m in a chunky placement and rights issue, with the retail leg yet to come. That means the company will have plenty of dollars to build its US sales team and fund growth in the 38 countries in which it operates.

Volpara’s original Volpara Density product was all about improving the detection and diagnosis of breast cancer, especially in the case of ‘dense’ breasted women who are at much greater risk of contracting the disease.

‘Dense’ – as opposed to fatty tissue - comes up white on a mammogram, as do tumors. As a result, cancers are also easier to miss.

The Wellington-based Volpara has also developed Volpara Enterprise, software for screening clinics to improve their efficiency and that’s where MRS comes into the equation.

MRS’s management software is used in 1700 US breast clinics, while Volpara Enterprise is deployed in just over 400 clinics.

The acquisition is certainly transformative, boosting Volpara’s expected revenue in 2019-20 from $US5.3m to $US12.8m (an 142 percent increase).

With a $330m market cap (pre raising), Volpara can draw inspiration from quiet home-town hero Pro Medicus (PME, $22.52), a radiology digital imaging outfit that now has five of the top 20 US hospitals on its books.

Pro Medicus, which does not compete with Volpara, had a $100m market cap five years ago. Now it’s worth more than $2.2 billion.

Also keep an eye on small but growing enterprise imaging provider Mach7 (M7T, 39c) which has been winning contracts in the US and elsewhere.

Tim Boreham edits The New Criterion

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

ENDS