MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at potential takeover targets.

Today we hear from Luke Laretive from Seneca Financial Solutions.

M&A activity has been hot in 2021 – with US$1.3 trillion in deals completed worldwide in the March quarter and another US$1.5 trillion in the June quarter.

 

What makes an ASX company a takeover target?

But not all ASX takeover targets are sought for the same reasons.

“If you’re talking about your Spark[s] (ASX:SKI) and Sydney Airport[s] (ASX:SYD), I think that’s almost a subset of M&A going on – you’ve got a lot of money tied up in super funds and super funds have a distinct preference for what we call alternative assets but that’s private assets,” Laretive told Stockhead.

“The reason why they like private assets is they have to mark them to market every day, they don’t have to worry about markets crashing or reporting negative returns to their customers.

“If they have got the capital to do that, they can take the assets private, report how much yield they’re getting off those assets without having mark them to market every day.

“So I understand the appeal for those really large billions/trillions of dollars type institutions, whether that’s a large super fund here or sovereign wealth fund overseas.”

Looking at resources, Laretive thinks it’s the point in the commodities cycle where consolidation makes sense, pointing to the example of lithium companies Galaxy Resources (ASX:GXY) and Orocobre (ASX:ORE).

“It’s a growth sector, lots of tailwinds and everyone’s bullish but you’re going to get greater returns by mining as a single entity,” he said.

“It’s going to give you cheaper access to capital and some more optionality and synergies around marketing and allow you to build greater relationships with customers – everyone forgets that’s actually the most important part.”

 

Smaller ASX takeover targets?

But what about for smaller industrial ASX companies that might be takeover targets?

“I think its earnings arbitrage,” Laretive said.

“There’s certain things you can buy at lower multiples, companies can fix them up and quickly add earnings accretive for business and I think there’s certain assets, you buy and [it] makes strategic sense to acquirers.”

 

Good Drinks Australia (ASX:GDA)

This West Australian company is in the beer brewing business owning several brands including Gage Roads, Atomic Beer Project and Matso’s Brewery.

It has a contract to supply Perth’s Optus Stadium and last year it won the right to operate Fremantle Harbour’s heritage listed “A-Shed”.

“The basic thesis here is, this is a business that was once majority owned by Woolworths and over the last 5 years or so, [current management] have bought back the business and transformed the brand with some really smart marketing and some really good operational strategy and performance,” Laretive said.

“They’re now selling largely their own brands, they’re selling increasing volumes, they’ve got really strong growth across the sectors and despite some difficulty with COVID impacting their strategy.”

Laretive noted reduced crowds for many months in Australian stadiums reduced the company’s exposure in the community but things are gradually returning to normal.

“If you look at the quarterlies you’ll see they’ve had some stellar results and I think that’s going to continue,” he said.

“I think the Sydney lockdown might negatively impact them in the short term but this is last available craft brewer of scale and significance in Australia that hasn’t been mopped up either as part of a roll up or by a large scale brewer.

“Craft beer as a segment is growing fast, alcoholic ginger beer is growing fast relative to your typical draught beer segment.

“So I think Good Drinks [is] a fantastic strategic buy for any of the majors and it’s going to be giving those guys exposure to that growing craft beer segments with some strong brands and some fantastic canning, bottling and brewing facilities over in Perth.”

Good Drinks Australia (ASX:GDA) share price chart

 

Apiam Animal Health (ASX:AHX)

Laretive’s second pick as a potential ASX takeover target is Victorian animal health company Apiam.

Apiam has had an impressive past year expanding through incremental acquisitions and its share price rising nearly 90%.

But Laretive has also been watching its joint venture partner PETstock which is a pet retailer as well as a shareholder in Apiam.

“I know PETstock have aspirations to list their business and I’m sure that’s on their mind at the moment,” he said.

“Apiam could be an easy and nice merger of equals for them to be able to merge, get some scale and diversify retail away from retail where I think Apiam have a niche with farm animals and feed animals – so I think that’s an obvious one.

“It’d be a 20-30-40% premium I’d suspect if they did want to make a bid for that.

“And with debt pretty cheap and I’d suspect access to equity pretty good in that sector with some strong structural tail winds, Apiam could be taken off the block.”

Apiam Animal Health (ASX:AHX) share price chart

 

Warrego Energy (ASX:WGO)

Warrego owns 50% of the West Erregulla onshore gas project in Perth Basin with the other half owned by Strike Energy (ASX:STX) which is the sole operator.

They’ve had some pretty good success over the five wells they’ve drilled and there’s clearly a really nice resource potential there,” Laretive said.

“That’s getting to the pointy end now with Warrego recently raising money to buying long lead items that go into building a gas plant and Strike probably need to raise money soon.”

“So I think it’d make sense those two entities are either snapped up by a major – like a Woodside (ASX:WPL) short of gas and need[ing] to sort out their long-term strategy and this would do it for them.

“Or Strike would use two times market cap of Warrego to buy out Warrego in total.

“Strike is now 8% of Warrego’s [shareholder] register, again a seemingly obvious tie up but I don’t think Warrego would let that asset or position go too easily.

“It’s probably worth 70 cents on my numbers, [Warrego’s] standalone [position] is 50% stake so trading as 25-26 cents it would need to be [at] a significant premium.”

Warrego Energy (ASX:WGO) share price chart

 

At Stockhead, we tell it like it is. While Apiam Animal Health and Warrego Energy are Stockhead advertisers, they did not sponsor this article. 

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.