In early April of 2014 global auditing and advisory firm Grant Thornton International released a report showing that Merger and Acquisition (M&A) activity around the world is up, year over year. 

Australian M&A activity is picking up as well.  A Credit Suisse equity report points to the $5 billion in total takeover offers this month for ASX listed Australand (ALZ), David Jones (DJS) and Goodman Fielder (GFF). The report contains a list of potential targets in the offing where investors could profit from speculation regarding takeover prospects.  Here are 10:

Potential target Code Mkt cap ($bn) Potential acquirer

Adelaide Brighton



Barro Grp (Private)

Aquila Resources



Baosteel (China)

Coca-Cola Amatil



SABMiller (Sth Africa/UK)

Echo Entertainment



Genting (Malaysia)

Incitec Pivot




Karoon Gas



Conoco Philips (US)




Sumitomo Chemical Corp (Japan)

Panoramic Res.



Asian Buyer

Sirius Resources



Asian Buyer

Western Areas



Asian Buyer

An acquiring company has at its disposal a raft of experts to evaluate a potential takeover target, but what of the average retail investor?  Generally speaking, investors can play M&A activity from both sides, as speculation usually leads to a rising share price for the target and ultimately a declining price for the acquiring company.  

There are a myriad of factors that go into an acquisition, not all of them financial.  In many cases issues like brand strength, corporate culture, and strategic fit with the acquiring company can actually outweigh financial measures.

Regardless of the attractive qualities of the target, the acquiring company is after a fair price at a minimum and at best, a bargain.  

Of the financial concerns, the two that are typically at the forefront are the cash and debt of the target.  A target company is more attractive with – more cash on hand, lower debt; and a history of generating strong cash flow.  However, much of this depends on the capabilities of the acquiring company.  A global behemoth looking for brand identification or synergistic product lines of the target may be less concerned about debt, as restructuring the debt may be possible for the acquirer. 

Let’s take a look at the ten of the targets identified by Credit Suisse with some of the commonly used evaluation metrics.


Share Price

(52 Wk % Change)

Current Ratio Quick Ratio EV/Mkt Cap

(Enterprise Value)




(Operating Cash Flow)




Price to Tangible Book


























































































































Note that with the exception of the two liquidity ratios (Current Ratio and Quick Ratio); the table appears to ignore debt measures.  Professional analysts prefer to begin with Enterprise Value for ratio analysis, since it incorporates the critical elements of cash and debt into its calculation.  Here is the formula:

•    Enterprise Value = Market Cap. + Preferred Stock + Debt – Excess Cash

The debt considered is both long term and short term and cash includes cash equivalents.  In the M&A game the acquiring company would ideally look for a company whose enterprise value exceeds its market cap by a decent margin.  In reality, companies can and often do pay far more than a target company is worth by any measure for other, often non-financial reasons.  

Two other key financial metrics in an analysis are EV/Sales or Revenue, and EV/EBITDA (Earnings before Interest, Taxes, and Depreciation).  Lower ratios are better, but you can’t compare across companies in different industries.  EBITDA is seen to be a more appropriate measure since it excludes discretionary expenses like capex, providing a more accurate measure of the target company’s cash flow from operations.  

Enterprise Value / EBITDA is a good measure of a company’s ability to service its debt as well as a better measure of profitability, since it sheds the impact of financing decisions.  In effect, the ratio takes what the company is worth and divides it by its ability to generate profit.

Cement and related products manufacturer Adelaide Brighton (ABC) is already partly owned by its suitor, privately held Barro Group, also in the concrete construction products business.  Comparing ABC’s EV/EBITDA ratio to another building materials provider, Boral Ltd (BLD) shows its ratio of 10.51 besting BLD’s 12.45.  Also, note that ABC is the only company in the table that has increased operating cash flow per share every year for the past three.  Synergy of product lines and markets is one of the non-quantitative aspects of M&A activity and Adelaide’s business would be a natural fit for Barro Group.

Iron ore and coal exploration company Aquila Resources (AQA) serves as stark evidence that there is money to be made punting on possible takeovers, and that the evaluation indicators can become irrelevant in the eyes of a hungry suitor.  On 05 May the Credit Suisse speculation about Baosteel’s interest in AQA became a reality as a hefty offer of $1.1 billion was put on the table.  The share price at the time was $2.40.  Here is what happened:

Baosteel is partnering with Australian freight operator Aurizon Holdings Ltd (AZJ) to make this offer, which is roughly twice the pre-announcement market cap of AQA. At $3.40 per share, the proposed offer represents close to a 40% increase over the last closing share price prior to the announcement.   Avid M&A enthusiasts may still be on the hunt, as a competitive bid for Aquila’s very attractive iron ore projects in the Pilbara mining region is a possibility.  

Coca Cola Amatil Limited (CCL) CCL is 30% owned by the US based Coca Cola Company and is licensed to manufacture and distribute Coke products in Australasia.  Coca Cola is one of the most recognised brands in the world, trailing only the Apple Corporation and Microsoft.  Although CCA’s share price has taken a beating, note the company’s enterprise value is over a billion dollars higher than its current market cap.  To put that into proper perspective, the enterprise values in our table reflect the most recent reporting period.  Market Cap changes daily.

Nevertheless, CCA has a solid record of generating cash flow from operations and has a low EV/EBITDA ratio of 8.34, which compares very favorably to Treasury Wine Estate (TWE) at 13.25.  The company reported a disastrous Full Year 2013 NPAT decline of 82% and is in the midst of a strategic review.  The initial report issued by a new General Managing Director on 11 April and the announcement, days later, of credit adjustments from both Moody’s and Standard & Poor’s did nothing to stop the bleeding.  Here is a price movement chart:

CCL has the numbers to make it an attractive takeover target, but the parent US Coca Cola Corporation has already refused a 2009 offer for the company.  However, SAB Miller is already one of the largest Coca Cola distributors on the planet, so the parent might be more favorable to an offer from an already known quantity.

Echo Entertainment (EGP) was spun off from Tabcorp Holdings (TAH) in 2011 and has had a rough time since.  However, in conjunction with the announcement of the approval of a new CEO, Echo released March Quarter revenue growth figures showing increases ranging from 5.7% to 13.2% and the shares got a much needed boost.  Here is the chart:

Despite its troubles, Echo has been able to generate operating cash flow and its EV/EBITDA ratio makes it a possible target.  Malaysian casino operator Genting already has a stake in EGP and would be a natural suitor.

Explosives, fertilizer, and chemicals manufacturer Incitec Pivot Ltd (IPL) is yet another company in the table whose enterprise value is higher than its current market cap.  However, its liquidity is spotty at best and the EV/EBITDA ratio does not scream out “Buy Me!”  Yet it is rumoured to be on the acquisition radar of Wesfarmers Ltd (WES), laden with cash to spend after selling off its insurance business.  Wesfarmers is reported to be looking for new revenue streams and the company has a successful track record of acquiring and operating diverse businesses.  

Yet Orica Limited (ORI) – a competitor of IPL is also rumoured to have WES casting a covetous eye on it and its numbers are better, with an EV/EBTDA ratio of 8.55.  Look down the table and there is another fertilizer company, Nufarm Limited (NUF) with even better numbers.  

Nufarm provides crop protection products and seeds and has suffered from a variety of woes, notably losing licensing agreements with US based Monsanto and Germany’s BASF.  The share price got a bit of a boost with 2014 Half Year Results showing profits more than doubling.  Here is a one year chart for NUF compared to IPL:

Oil and Gas explorer Karoon Gas (KAR) is in the midst of a trading halt, pending an announcement about funding future operations.  The company has attractive prospects in Australia and Brazil along with Peru and has an existing joint venture with Conoco Philips in Australia.  Karoon is trading below its tangible book value and the share price could rebound in the event of a successful outcome of its search for financing.  A Conoco Philips takeover could also be a possibility, at least according to Credit Suisse.  The company went public on the ASX in 2004.  Here is a ten year chart for punters interested in taking a ride on Karoon.

The final three targets, Panoramic Resources Limited (PAN), Sirius Resources (SIR) and Western Areas Ltd (WSA), are nickel miners benefiting from the close to 30% rise in the price of nickel so far this year.  In addition, sanctions on Russia, a major producer of refined nickel, are adding fuel.  Sirius Resources is still in the exploration phase, which could explain its share price lagging behind.  Note that despite a year over year share price increase of 120%, Panoramic Resources is still trading below its tangible book value and Western Areas has the lowest EV/EBITDA ratio of any stock in the table.  Nickel is a key ingredient of stainless steel and any one of these companies could be in the sights of Asian steel manufacturers.  Here is a one year chart comparing the two big winners, PAN and WSA.  

Since EBITDA ‘normalises’ profits, it allows the investor to compare the earnings capability of a company without worrying about its capital structure, or financial leverage.  In the same way, this makes EBITDA the ideal measure to standardise the value of a company.

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