Takeover fever – why is it happening and will it continue?
The month of December has seen a number of takeover bids – such as for Tox Free Solutions by Cleanaway, Capitol Health’s intended bid for Integral Diagnostics and the huge Westfield Corporation bid by Unibail-Rodamco. These takeovers have presented something of a Christmas gift to our investors given these stocks are key holdings in IML & QVE portfolios.
The growing wave of takeover bids for quality companies should be of no real surprise to investors. We summarise below the main reasons why we are seeing a pickup in corporate activity:
Growth is harder to find for many corporate in many industries
With the economy patchy, growth is scarce in many sectors and acquisitions can be attractive given that such deals often give rise to material cost synergies or other benefits. In the case of Cleanaway’s bid for Tox Free Solutions, the deal is estimated to give rise to savings on the combined cost base of over $35m over the next few years. That is not to mention the opportunities that Cleanaway will have to upsell its existing services to Tox Free’s customer base and vice versa. In our view, the Cleanaway bid is a very good example of not only the ongoing pursuit of growth by corporates through strategic takeovers, but also highlights the appeal of quality, well established industrials that are trading at discounts to their fair value.
Debt is cheap
With interest rates around the globe at multi-decade lows, the use of debt to partially fund acquisitions can make the economics of takeover deals very attractive. For instance, Unibail-Rodamco, the acquirer of Westfield Corporation has currently locked in medium term debt out to 2030 of as low as 1.375% per annum. With debt available at such low levels, it is a great incentive to chase accretive deals offering significantly higher rates of return.
Scale in the face of disruption
With traditional business models under pressure from new entrants offering new ways of doing business, a well-placed acquisition can bring scale, integration benefits or new capabilities, which can improve the ability to compete. A key holding in IML’s small cap funds, Melbourne IT is an example of a company that has transformed itself into a digital solutions business for small and enterprise business through a series of key acquisitions over the last three years.