Derek Pain: Takeover of G4S is a rumour – but one that can't be ignored

No Pain, No Gain
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The Independent Online

Corporate activity has provided very little fuel for the stock market since the credit crunch devoured the ambitions of many of the private equity groups that at one time stalked the land. Brewer Scottish & Newcastle was the last No Pain, No Gain portfolio constituent to succumb to a takeover strike. And its absorption occurred more than two years ago. Since then, the City has experienced occasional flurries of bid activity, but in the main the people that grew richer advising and arranging deals have endured much more subdued times.

Still, in the past two weeks there has been the occasional hint that G4S, the security group that was recruited to the portfolio as recently as last month, could be on a marauder's agenda. Should the rumours turn out to be true, it could represent the quickest takeover coup the portfolio has ever enjoyed. Over the years it has delivered some notable bid successes. Allied Domecq, Burtonwood, La Tasca and Merrydown are some of its other hits. But they would be outshone should a quick G4S offer materialise.

I am not holding my breath. Unfulfilled rumours often fly around. They are meat and drink to many dealers, hoping to make a quick turn. Nevertheless, stock-market gossip cannot be dismissed. I descended on G4S (the result of a merger between Group 4 and Securicor six years ago) at 264p a share. Considering recent stock-market gyrations, the shares have, allowing for the dividend being stripped out, put on a solid display. Their performance follows a good run in the past year when they climbed from 195p. In those 12 months prices in general made surprising headway. Even so, there is nothing in the G4S display to detract from the takeover theory.

However, with a £3.8bn capitalisation, only the mega-rich could express an interest. The most popular suggestion is that a consortium commanding an array of deep pockets and led by American investment house Kohlberg Kravis Roberts is on the prowl and has picked up some shares. G4S shares are fairly highly rated. According to the rumour mill, the bidder is prepared to offer a quite incredible 375p.

Mind you, the security group has much going for it and could well command an exotic price. Last year it produced pre-tax profits of £302.8m. This year's figure is expected to be not far short of £400m. With violence – both real and threatened – now seemingly an everyday occurrence, the trading outlook for the world's biggest security group, which spreads from providing cover for rock concerts to protecting government officials, should be excellent.

Two other, much smaller, portfolio constituents, have produced trading bulletins. Mears, has a capitalisation of around £255m; the much tinier SnackTime is valued at only £12.2m. Mears, a support services group involved in social housing and domiciliary care, talks of "strong trading" in its current year. New contracts continue to be won with 91 per cent of the current year's expected income and 77 per cent of next year's already in the bag. The shares were recruited two years ago at 272p. SnackTime says it will report on the year ended March in July. In the meantime it declared that profits should reach stock-market expectations - around £1.3m. Last year's figure was £202,000.

It's been a busy year for the group, supplying drinks and snacks through vending machines which are mostly aimed at factory, office and shop workers. Highlights were the £1.5m acquisition of its biggest rival, MBM Business Systems, and a £5.8m private placing at 170p a share. The extra cash was used to increase its network of vending machines and expand marketing operations. More acquisitions are almost certainly in the pipeline.

It seems SnackTime is continuing to fare well in its current year with chief executive Blair Jenkins saying "significant new business" has been gained and they are anticipating "strong growth". I recruited the shares in September at 119p. They are rarely traded and could, therefore, be subjected to violent swings. The company has displayed a willingness to sprinkle shares around the investment community and I would not be surprised if the next takeover involves the issue of more shares.

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