The bid for Treasury Wine Estates by private equity group KKR last week has again focussed investors’ attention on potential gains that can be made from buying the next target.
How to pick them
Tom Elliott, director at Beulah Capital, knows a thing or two about takeover companies and has a whole portfolio based on the concept that certain companies will eventually be acquired by other companies.
“We sort of comb through the shareholder registers of what we see as target companies and that’s how we come up with our lists of stocks,” Elliott said on Switzer TV last week.
They look for concentrations of shareholdings by certain investors.
“Channel 10 has got takeover written all over it because you’ve got James Packer, Lachlan Murdoch, Gina Rinehart all there as substantial shareholders but at the same time it’s in a terrible industry at the moment,” Elliott says.
Although not an official takeover, last week infrastructure fund Spark announced it was buying a 14.1% stake in gas pipeline group DUET. Spark said they had “no current intention” to make a full takeover bid. But that doesn’t necessarily mean they won’t.
“No current intention could be changed at any time,” Elliott explains.
“Companies like that don’t go and buy 14% of each other without having some kind of evil intention towards the other stock.”
Don’t be surprised if Woolworths SA ups its bid for David Jones either.
“David Jones is trading as though the Woolworths bid will go through at this price but it is still possible Woollies will have to chuck a bit of extra cash on the table to get some shareholders on side,” Elliott says.
What to buy
Of all the companies potentially in play at the moment, Elliott says the one that has the most to gain, is DUET.
“That’s got the most potential in it, however you don’t have a bid on the table to prevent any future losses,” he says.
Another interesting play would be Envestra Limited, as it currently has its two largest shareholders vying for it – APA Group and Hong Kong-based Cheung Kong Group.
“And the other one I reckon would be Treasury and KKR…I reckon they wouldn’t mind paying a bit extra to get this one,” Elliott says.
But you shouldn’t buy a company solely on its acquisition potential. A stock needs to be a solid investment as well.
“The fundamental rule is you must be happy to own the stock in the absence of the bid,” Elliott says.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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