Podcast: March Takeover Surge in the Australian Market: A Closer Look

Hear from Sinclair Currie and Tim Binsted from NovaPort Capital, as they discuss recent M&A activity in the Australian market. 


Sinead Rafferty: Good morning and welcome to the NovaPort Narratives podcast series where we discuss news and marketing insights relating to the world of Australian small- and micro-cap companies. I’m Sinead Rafferty, Senior Investment Specialist at Fidante, and today I’m joined by Sinclair Currie and Tim Binsted from NovaPort Capital. We’ll be discussing M&A activity in the Australian share market. So let’s get started.

Sinclair, if I throw to you first, the reduction of liquidity brought about by higher interest rates and quantitative tightening, was exacerbated in March by the turmoil in the banking sector led by the collapse of Silicon Valley Bank and Credit Suisse. Do tighter financial conditions and a tougher economic climate mean the companies are more open to accepting a takeover offer in your view?

Sinclair Currie: I think the answer to that, Sinead, is it depends. And the reason I say that, is because for some companies, particularly those companies which don’t generate much cash flow early stage business models and still require additional funding to achieve their ambitions, definitely a takeover offer probably looks more attractive for their shareholders at this point in time. If you are a company which has got a more established business, generating strong cash flows, a tighter financial environment, financial conditions, is probably less relevant. So the real issue there is what’s the price? If you are a board of a small cap company subject to a takeover bid coming into a soft debt economic environment, you probably don’t want to sell the company too cheap, because of the short term out outlook. So it really depends on: (a) whether you need capital, and (b) whether or not the price is good enough.

Sinead Rafferty: And Tim, there’s been a number of takeover offers across the market in the last couple of weeks and months. Can you share some of the ones and that have impacted some of your holdings?

Tim Binsted: Yeah, sure. It’s been a busy period of activity for M&A, and our portfolio’s been no exception to that. Look beauty’s in the eye of the beholder a bit, with takeovers, so everyone’s looking for a different angle. But there’s a couple of themes across some of the stocks. Asset heavy, so businesses that have real assets, whether it’s plant, land, things that would be much harder to replace, or more expensive to replace in a inflationary environment where costs have gone up a lot.

Just look at the cost of building a home, which a lot of people, or renovating, which a lot of people would be well across at the moment, it applies to these companies as well. Stocks that have strong market shares, for example, InvoCare, a funeral home provider, roughly 25% of the market, very good market share, United Malt, fourth largest malt star in the world, received a bid from a European based rival strategic assets. In both cases, these companies were also under-earning. A few missteps from companies not keeping up with the inflationary pressures, saw some earnings declines, but people with a longer term horizon can see through that, can see higher earnings in the future.

So back to Sinclair’s point on your first question, what’s the multiple being paid? What’s the level of earnings? Is it the real level of earnings? So don’t sell too cheap to boards. Private equity, you can see the earnings power that we see in some of these stocks, and it’s higher than where it is today.

Sinead Rafferty: Okay. So given the fact that you invest in the small and microcap end of the market, do you see additional takeover offers as a source of alpha in your portfolio, and more of an opportunity than in the large cap part of the market?

Sinclair Currie: Absolutely. We think it’s more of an opportunity in small relative to large. The simple reason is large companies often view small caps, or smaller companies as an opportunity to drive more earnings growth in weaker economic environments. That’s one factor. But there’s also another factor, which is that there are a lot more companies that can write a check for the size which is required to buy a small cap company. It’s more doable in terms of funding. Recently, SILK Laser, which is a cosmetic clinic’s network, has been bid for by Wesfarmers. There’s a classic example of where a larger company has looked at a smaller company and seen an opportunity to accelerate its growth profile via acquisition. So those sorts of things where we have holdings in the portfolio and we can identify good solid businesses with decent market share, good earnings track record, they are attractive to other people as well, even if the market sometimes doesn’t appreciate that value.

Sinead Rafferty: And is there significant premiums when these offers come through?

Sinclair Currie: The premiums have ranged between 30 to up to almost 50%. So the premiums are healthy. I think to our minds, there’s two levels of premium that need to get paid for here. There’s a premium for control. When you have control of the assets, you’ve got more say in how you time things, how you make things change, how you realize asset value. So there’s premium we have to pay for that. And there’s also a premium which reflects what might be an undervaluation in the marketplace, a fundamental undervaluation itself. So we think we have to look at both those things in isolation to work out what the appropriate price, or what an acceptable price is when a private equity or a competitor lob a bid for one of these companies.

Tim Binsted: And I think that also goes back a bit, Sinead to that asset backing that lost those companies half in the replacement value. So you could say, well, what’s the premium relative to rebuilding those assets today, rebuilding that market share position today, and also backs that under-earning common area. What’s your multiple of earnings today? Well, if the earnings going to grow significantly in the future, there may the multiple and the premium’s not as rosy as it looks at first glance.

Sinclair Currie: To Tim’s point, Estia Healthcare, which has been subject to a bid, I think it owns something like 800,000 square meters of land across the major cities of Australia. That’s a real asset value, which is not reflected in the book value of the business, which needs to be accounted for, if it’s going to be a fair price that’s being offered for that business.

Sinead Rafferty: And just finally, do you think there’s going to be more offers forthcoming given the amount of dry powder that’s in the private equity market?

Sinclair Currie: Look, we’d have to say it’s highly likely. An awful lot of money was raised over the last three years in private equity and that money needs to be deployed. We can’t say exactly what private equity fundraising’s going to do in the year ahead, but the fact that they have raised that money in the past, means that for the foreseeable future, they’re going to be looking to deploy that. So we would say that there’s definitely opportunities to identify assets which would be attractive to private equity.

Sinead Rafferty: Okay. So that concludes the update for today. Thank you both for your time. We look forward to sharing further updates in future episodes of this podcast.

Tim Binsted: Thanks, Sinead.

Sinclair Currie: Thanks.

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