Given the premium acquiring companies are willing to pay, investors may wish to give some thought to what unloved ASX-listed stocks look ripe to exit the Australian bourse later this year.
The ASX has always been a fertile hunting ground for undervalued stocks, so much so that the ranks of listed bellwether blue-chip stocks are thinning fast, with stocks valued at as little as $1 billion now sitting well within the ASX300.
Our bourse is shrinking
M&A activity is clearly having a material impact on both the ASX size (by value) and the availability of quality stocks for punters to invest in.
Following on from its recent acquisitions of Crown in 2022 and more recently AirTrunk, the $1.7 trillion private capital giant Blackstone is said to have a number of companies in its sights for takeover later this year.
But Blackstone is just one of many institutional investors that see bleeding value in key ASX stocks, and it’s not always large caps that are on its radar.
Earlier last week we witnessed the Montreal-based dollar store chain, Dollarama (TSX: DOL) acquire the largest discount retailer in Australia, The Reject Shop (ASX: TRS).
When you look at the premium Dollarama was willing to cough up for The Reject Shop - 112% to the closing share price on 26 March, you can start to see the valuation proposition being ascribed to quality local stocks.
Is volatility an acquirer’s friend?
Following hotly on The Reject Shop deal, U.S. real estate giant CoStar has raised its bid to buy property listings platform Domain (ASX: DHG). Domain, with a market cap of $2.7 billion is an ASX200 stock.
Admittedly, the CoStar bid premium isn't in the Dollarama league. However, at 42% the premium ascribed to Domain’s share price on February 20 - and a 5.5% uplift on its first proposal – is none too shabby.
While there’s no guarantee of a deal proceeding, CoStar said $4.43 a share was its highest and final offer price.
The timing of these recent bids also suggests that widespread volatility triggered by U.S. President Donald Trump’s trade war could flush out more M&A activity earlier than expected.
Perfect calm for takeovers
Valuations aside, the low Australian dollar (AUD vs USD) compared to its long-term history makes Australian companies more attractively priced for overseas acquirers, especially if they have operations overseas.
Since late September last year the A$ has fallen a little under 10% to around US$0.62.84.
Other factors identified by First Samuel as complementary to M&A activity include:
A low growth environment: Companies aspiring to grow often look to acquire complementary operations to extract synergies or enter a new market or geography.
Interest rates appear to have peaked: giving boards and management teams with solid corporate balance sheets the confidence to borrow and commit to M&A.
Poorly managed companies often lead to mispriced assets: We witnessed this with the Paragon Care merger with Clifford Hallam Health, and the KKR takeover of United Malt.
Then there’s the failed $2.2 billion bid for perpetual (ASX: PPT) by KKR. Much of the discount the stock is currently trading at has been ascribed to the [poor] quality of its management.
While KKR may not return with another bid, other suitors might see beyond the tax issues and finally take it out.
Balance sheet efficiency opportunity: On some occasions, hidden tax losses or dividend imputation credits may be valuable in the hands of an acquirer.
Adding new capability: In some cases, a company may be interested in adding a new business line in an adjacent market or a new technology or capability that enhances its business.
PE arbitrage: Stocks trading on higher multiples may use their higher-valued script to acquire within or overseas.
We witness this through Steadfast Group’s (ASX: SDF) progressive expansion via acquisition in the U.S.
ASX stocks that could be ripe for a takeover
Given that market conditions look ripe for M&A activity, Azzet went looking for potential ASX-listed takeover targets.
Resource stocks are at the best of times a fertile ground for M&A activity, and earlier this year we saw Global Lithium (ASX: GL1) come under Chinese acquirers.
However, resources aside, there are stocks across the ASX that could come under suitors' eyes later this year. Here are some we identified.
• Cleanaway Waste Management (ASX: CWY) market cap $5.8 billion, share price down 3% over one year.
• Bega Cheese (ASX: BGA) market cap $1,6 billion, share price up 28% in one year.
• Aurelia Metals (ASX: AMI) market cap $431 million, share price up 64% in one year.
• Earlypay (ASX: EPY) market cap $62 million, share price up 21% over one year.
• Austal (ASX: ASB) market cap $1.7 billion, share price up 91% over one year.
• Droneshield (ASX: DRO) market cap $821 million, share price up 28% in one year.
• Silk Logistics Holdings Ltd (ASX: SLH) market cap $117 million, share price down 11% in one year.
• Pilbara Minerals (ASX: PLS) market cap $5.9 billion, share price down 52% in one year.
• Lynas Rare Earths (ASX: LYC) market cap $6.8 billion, share price up 27% in one year.
• Liontown Resources (ASX: LTR) market cap $1.5 billion, share price down 44% in one year.
• Treasury Wines Estate (ASX: TWE) market cap $8 billion, share price down 20% in one year.
• Ramsay Healthcare (ASX: RHC) market cap $7.9 billion, share price down 38% in one year.
• a2Milk Co (ASX: A2M) market cap $5.7 billion, share price up 27% in one year.
• Johns Lyng Group (ASX: JLG) market cap $617 million, share price down 65% in one year.
• Infomedia (ASX: IMF) market cap $513 million, share price down 23% in one year.
• Judo Bank (ASX: JDO) market cap is $2 billion, share price is up 40% in one year.
• Iress (ASX: IRE) market cap $1.5 billion, share price down 2% in one year.
• Chalice Mining (ASX: CHN) market cap $470 million, share price up 12% in one year.
