Criterion: How to hit the next small-cap bullseye in a red-hot takeovers market

The takeover action at the top end is spilling down to the small-to-mid cap sector
Undervalued small cap offers are struck at higher premiums to larger takeovers
M&A action has been seen in multiple sectors, with a heterogenous mix of targets and acquirers

2025 is shaping up as the year of the takeover, with hungry predators appearing like spot fires on a sweltering summer’s day.

In a gold sector quivering with M&A speculation, Northern Star Resources (ASX:NST) this week launched a $5 billion takeover bid for a widely vaunted target, De Grey Mining (ASX:DEG).

But as last week’s tilt at revered home builder AV Jennings (ASX:AVJ) shows, small caps can also expect a knock on the door – and that’s where the undervalued and juiciest situations are most likely to be found.

On Seneca Financial Solutions’ analysis, in recent times Australian small caps have attracted an average takeover premium of 63% (median 54%), compared with the global average for all takeovers of 25-30%.

In hindsight the deeply undervalued AV Jennings was a no-brainer target, with the offer struck at a 104% premium to win the endorsement of its controlling Singaporean holder.

Otherwise, there’s no discernible pattern in terms of the type of acquirer, the targeted sectors and the structure of the deal.

Last month, private equiteer Pacific Equity Partners lobbed a surprise $1.2 billion tilt at salary packager and fleet manager SG Fleet (ASX:SGF). Earlier, the private-equity backed Ardonagh Group bought out PSC Insurance for $2.3 billion.

So far, private equity in the main has kept its powder dry: the bidders are more likely to be industry players, such as DP World Australia’s $175 offer for logistics frenemy Silk Logistics Holdings (ASX:SLH).

One trend is the proliferation of contested takeovers with a hostile edge.

In the case of SelfWealth (ASX:SWF), Bell Financial Group’s (ASX:BFG) $58 million entreaty was swiftly followed by one from Axicorp Financial Services (Bell looks to have won the day).

Telco Vonex (ASX:VN8) last month recommended holders accept an all-cash offer from Maxotel Telco, after Swoop Holdings er – swooped – in with a scrip offer.

Dental chain Pacific Smiles (ASX:PSQ) has attracted the attention of Beam Dental (Genesis Capital), with National Dental Co in a twisting takeover saga that has endured for almost a year.

Picking the next target is like betting on the greyhounds, but plenty of ‘punters’ are willing to head to the track.

Earlier in the year Investors Mutual nominated Integral Diagnostics (ASX:IDX), stockfeed group Ridley Corporation (ASX:RIC) and Bega Cheese (ASX:BGA), custodian of the Dairy Farmers and Pura brands.

Integral Diagnostics is merging with Capitol Health (ASX:CAJ) – albeit as an acquirer – but good job anyway!

Seneca – which runs a small caps fund – had picked De Grey ahead of the takeover offer.

The firm also cites industry pioneer Monash IVF Group (ASX:MVF), which has scarcity value as the remaining ASX-listed fertility services provider.

The firm cites mining services house RPM Global (ASX:RUL) because it has nine of the top 10 global miners on its books and is cheaper than its peers. In the words of RPM CEO Richard Matthews, the company was “built to sell”.

A global leader in sports technology and analytics, Catapult Group (ASX:CAT) also ticks Seneca’s boxes despite an 185% share surge over the last year.

Pointsbet (ASX:PBH) last month denied a takeover approach, but it could be a case of ‘no smoke without fire’. The online bookie is turning profitable and this may see an acquirer act sooner rather than later.

Seneca says takeover candidates are such because they are cheap (of course) and gettable (an open register). They also need to have scarce hard-to-replace assets and offer synergies to the acquirer.

“Picking takeover targets is certainly not the sole reason to hold an investment thesis,” says Seneca equities analyst Ben Richards.

“Chasing deals can be fraught with danger given the uncertainties involving different companies and prevailing business conditions.”

Likewise, Investors Mutual doesn’t invest in stocks because they are likely to be taken over, but thinks like an acquirer in its selection process.

“There’s a lot of overlap between why we buy shares in a company and why someone might want to buy the entire business,” says investment manager Marc Whittaker.

“If the market doesn’t recognise the value, someone else just might.”

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision