Investment theme: Merger and acquisitions
M&A activities occur from time to time, and most often the consolidations are pure sector events. Frequently, not only do takeover candidates show an improvement in performance, but non-courted candidates do too.
At present the merger and acquisition market is focusing primarily on the telecom and pharmaceutical industries. While telecom M&A activity is now about one year old, the M&A activity in the pharma industry is a relatively new story.
The sector consolidation in the telecom market is mainly due to: a) the entrance of new challengers, b) lowering returns, and c) existing operators need to invest about €20 to 25 billion to maintain their infrastructure.
The activity in the pharma sector is driven by: a) exploiting synergies, b) acquiring core drugs in particular sub-sectors such as the orphan drug market, and c) acquiring international exposure.
Our favorites:
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Rémy Cointreau | RCOP | Beverages | 13.3 % | 4.36 |
| Investment case: In a move that would continue the consolidation of this sub-sector, Bacardi and Brown-Forman could be interested in taking over RCI; however, reaching an understanding between the three involved families would be the key to this deal taking place. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| SABMiller | SAB | Beverages | 9.1 % | 5.34 |
| Investment case: AB Inbev (ABI) could be interested in taking over SAB. ABI currently has no business exposure to Africa and only limited exposure to Latin America, and both of these continents offer valuable long-term opportunities. A deal with SAB would open these doors. Apart from SAB’s good fundamentals, ABI also has a strong technical case to look at. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| HeidelbergCement | HEI | Building Materials | 16.2 % | 4.13 |
| Investment case: With the recent merger of Holcim and Lafarge, other cement producers should act rapidly so as not to lose out on remaining available opportunities. HEI could be the ideal opportunity for a number of companies such as CRH, CEMEX, Buzzi Unicem, Italcementi. Any of these companies would be capable of exploiting the synergies in a perfect manner. Additionally, HEI’s fundamentals are perfect. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Ansaldo STS | STS | Transportation | 10 % | 4.9 |
| Investment case: STS has affirmed its willingness for sector consolidation beause it is small and has no railroad exposure. With the take over of Alstom by GE, other companies such as Siemens, Hitachi, Bombardier, Thales, CSR and CNR may have also been inspired to join in on the consolidation activities. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Arkema | AKE | Chemicals | 18.5 % | 5.10 |
| Investment case: For a number years now, the chemical sector has been transforming and consolidating. AKE is an ideal candidate for a takeover due to its distinct product portfolio. Additionally, it has higher margins than its direct competitors. Possible purchasers could include BASF, SBIC, and DuPont. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Croda | CRDA | Chemicals | 6.5 % | 5.0 |
| Investment case: The consumer ingredients sub-sector is highly fragmented. CRDA’s products are well focused for specific market requirements, on this basis the company is a good takeover target. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Elementis | ELM | Chemicals | 14.4 % | 3.96 |
| Investment case: Elementis has a widely diversified portfolio of products which are mainly based on hectorite. The company’s takeover potential is high. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Lanxess | LXSG | Chemicals | 16.4 % | 4.27 |
| Investment case: For a number of years now, the chemical sector has been transforming and consolidating. LXS is particularly exposed to this trend. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Royal Sun Alliance | RSA | Insurance | 8.7 % | 4.15 |
| Investment case: For some years now, RSA has driven its niche activities forward, and they are performing extremely well at present. This makes the company a highly attractive takeover target. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Shire Plc | SHP | Biotechnology | 12.3 % | 4.73 |
| Investment case: Shire has a highly attractive orphan product portfolio focused on the treatment of rare diseases. Given its business, Shire has high “pricing power” and in terms of the products and markets it covers, it is is highly attractive. Yet, its present share price is close to being overdone. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Stada Arzneimittel | STAG | Pharmaceuticals | 13.4 % | 3.97 |
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