No Pain, No Gain: Romping shares? Watch out for the takeover bids

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The Independent Online

Takeovers help the stock market go round. They probably have more influence than any other single activity. In the past year, as shares have romped ahead, overcoming the occasional hiccup, there has been a profusion of bids and many more will emerge in the next few months.

Corporate action and bull markets go together. They feed off each other. If the investment environment is cheerful, it encourages takeovers although the advent of private equity funds, forsaking share exchanges in favour of cash, may have restrained some of the more irrational strikes that have been such a feature of past euphoria.

Of course, many other factors contribute to the stock market's display. The nation's overall economic performance and such irritants as interest rates, consumer spending and industrial unrest can have considerable impact. In recent times, investors have also had to contend with terrorism and the soaring crude oil price.

But when it comes to the crunch it is often those bids and deals that sway sentiment. This year has witnessed some spectacular action including the capitulation of Allied Domecq, a constituent of both the FTSE 100 Index and the No Pain, No Gain portfolio. It fell to the French Pernod Ricard group for £7.6bn.

Another cross channel entity, Saint-Gobain, is offering £3.7bn for Footsie member BPB, the plaster board maker. And its seems that 02, the mobile phone group, will be lucky to survive the year under its own banner. The world and its dog expect takeover action.

In the case of O2, a bid price of between 160p and 170p seems likely. If it should materialise it will represent an annoying ringtone for the small shareholders that opted for the 130p a share buy back earlier this year. They have already suffered the indignity of 02 rewarding those who remained on the share register with a larger than expected maiden dividend. The shares are now around 150p.

There has been the usual round of bid denials. KPN of Holland and Deutsche Telekom admitted talking about a joint assault but have, for the time being, retreated. Still others, I suspect, are interested and if one of them moves, KPN or Deutsche could join in.

The portfolio has two remaining Footsie stocks - and both are vulnerable. Brewer Scottish & Newcastle is one; the other is Rentokil Initial, the pest control to security group.

Naturally it is the blue chip bids that attract the headlines. But down among the small fry volume is far stronger. Of course the amounts involved are much less. This year the portfolio has lost two fully listed smallcaps through friendly takeovers - Burtonwood, a pub chain, and Merrydown, the cider and adult soft drink group. Both departed at a handsome profit. Another portfolio member, MacLellan, a support group, attracted an approach but the offer fell short of the 100p a share the entrenched management demanded. And I note that Urbium, the late night bars chain which I almost recruited a year or so ago, is likely to fall to a private equity house for more than £100m in cash.

It is not too difficult picking takeover candidates. The trouble is there is never any guarantee a bidder will appear and the timing of any offer is hard to predict. For example, Allied had been in the bid frame for years. It was clear something was going to happen as the drinks industry continued to consolidate. But when and what form any action would take were imponderables.

In May I suggested Belhaven could succumb. This week Greene King splashed out £254m for the privilege of owning Scotland's last local brewer of any significance. I am quite sure Scottish will attract some form of corporate activity but it could be one of those nil premium mergers, beloved by some managements. And Rentokil, with Sir Gerry Robinson hovering, is surely in the firing line.

I am hopeful other smallcap portfolio constituents will fall to predators. Prezzo, the restaurant chain, must be a candidate and I would not be at all surprised if MacLellan eventually agrees a deal. I don't think either share has attracted much, if any, bid premium.

With stock market bulls frequently in rampant form and bid action in the ascendancy the FTSE 100 index is having its best run since the millennium dawned. With nearly eight months of the year gone, it looks as though my forecast that it will hit 5,500 points may be just a little too ambitious. Still, it recently reached 5,377, so I am not yet prepared to throw in the towel. Much can happen in the City in four months.

Many of my earlier Footsie predictions have proved to be far too optimistic. It makes a change to at last be on the right road.

cash@independent.co.uk

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