General | Feb 05 2006
A growing trend in equity markets is for hedge funds to play a role in takeover battles, with the traders happy to enter markets where the downside is limited to the current takeover offer but there is significant potential upside from a higher or counter offer.
A prime recent example was the Woolworths (WOW) takeover of hotel group ALH, as with Coles Myer (CML) also an interested party the hedge funds continued to push market prices above the level of the highest offer as they bet on the battle forcing up the final price.
ABN Amro notes there are currently 22 takeover plays in the Australian market, making it again a place of opportunity for the hedge funds, particularly as in a number of situations the views of stockbrokers and equity researchers is current offers will have to be increased for the takeovers to be successfully completed.
With this in mind the broker has looked at the potential of the market from three points of view – those deals already announced, those it suggests are likely given the benefits involved and those where a deal could possibly emerge.
Starting with deals already on the table, the broker suggests the Toll Holdings (TOL)/Patrick (PRK) and Origin (ORN)/Contact Energy (CEN.NZ) deals are prime plays, as in its view the terms of both deals will need to be improved. This offers the potential for upside from long positions in the targets, Patrick and Contact.
Similarly, the broker sees upside from taking a long position in Wattyl (WYL) as the Barloworld offer is above the current market price. This reflects the risk of the ACCC knocking back the takeover on competition grounds, making a long position in the stock a classic high risk/high reward play.
In terms of what it classes as predictable events, meaning there is potential for a deal but no details have yet been released, the broker includes E*Trade (ETR) and IWL (IWL) as the two companies have confirmed discussions but not released any further information, while SDS Corporation (SDS) is in a similar position.
Other potential plays include Brambles (BIL) for the disbanding of its dual-listed company structure, while it notes there are rumours and speculation of potential deals in stocks such as Axa Asia Pacific (AXA), which has a major shareholder who has previously bid for the rest of the company, and Investa Property (IPG).
In terms of ideas that make sense but where there has been no evidence of activity, the broker includes takeovers of Australian gold stocks (think Newcrest (NCM) as the most obvious target) by North American producers, along with further consolidation in the oil and gas sector. The broker also suggests global mining house Xstrata may look to continue trying to expand its Australian operations, with an acquisition in the coal sector the most likely target.
The broker also sees the potential for further consolidation in the gaming sector, even beyond the current proposed merger between Tattersall’s (TTS) and UNiTAB (UTB), with Sky City (SKC.NZ) a likely target in its view. It suggests it is still too early to be looking for similar consolidation in the media or banking sectors, while it discounts the likelihood of consolidation in the insurance sector.
