Trading Strategies: Want to get in before a bid? Look at book value

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Every sector that depends on consumer spending is currently running a takeover story, from the predators circling Boots to the acquisition of the sole remaining listed health-club operator, LA Fitness.

Every sector that depends on consumer spending is currently running a takeover story, from the predators circling Boots to the acquisition of the sole remaining listed health-club operator, LA Fitness.

This is what every investor wants - to be on the receiving end of a takeover bid is the nearest thing to a guaranteed windfall. But the exciting profits are to be made by getting in before there is even a hint of a rumour, which is altogether more tricky.

One key feature to look for is a strong "book value" or "net asset value". A company's book value, listed in its report and accounts, is essentially what a company would be worth if it were closed down tomorrow, its debts repaid and its assets sold. Where a company's stock market capitalisation is less than its book value, you know the share price is backed by assets that could, if necessary, be realised. In effect, the business is thrown in for free.

What you are looking for are attractive, resellable assets, after intangible assets such as goodwill have been stripped out. The ideal is an estate of desirable properties, and if they have not been revalued for a few years, so much the better.

A wall of money is currently chasing the best commercial property.

Just think of the trouble the property company Minerva went to in its eagerness to secure a site at the new Park Place shopping centre planned in Croydon, an area where many residential developments are scheduled. Minerva bought an entire department-store chain, Allders, with the primary purpose of acquiring the store's single pitch at the shop- ping complex.

Allders is now in administration and Minerva has written off a loan of £21.9m to Scarlet Retail, the company set up to manage it. Worse, the new pensions regulator is looking into whether Minerva has any responsibility for the department store's £14.5m pension deficit.

Private equity firms such as Cinven and Permira, which are hungry for investment opportunities, are particularly interested in property portfolios because they can be used as security for debt. The modern sale-and-leaseback structure means that a private equity firm can borrow up to 85 per cent of the value of a business. But many companies have decided to take advantage of intense demand for retail sites and sell the family silver themselves. Debenhams, Travelodge, Marks & Spencer and Tesco have all completed sale-and-leaseback deals in recent months.

Generally, the idea is not to tie up too much capital in areas that are not central to the business's core operations, but for a handful of companies there is an element of ensuring that a hostile predator will not make off with the freeholds.

Boots announced plans in January to complete the sale and leaseback of 300 properties over the summer, generating about £250m to pay off short-term borrowings. Its fire sale began last year when it sold its laser eyecare and dentistry operations to Optical Express, and Boots now plans to flog the jewel in its crown, Healthcare International, which makes great brands such as Nurofen and Clearasil.

Another loss-making company with a decent property portfolio is Coffee Republic, where the red ink was just short of £1m last year. Try as he might, founder Bobby Hashemi cannot make his ship as tight as rival Gerry Ford at Caffè Nero. Having steadily sold off its worst-performing coffee shops, Hashemi is now rolling out his latest deli and internet surfing formula into the remaining 45 outlets.

Thorntons Chocolate is also a perennial disappointment. Two years ago, it introduced a strategy to grow sales in third-party retailers and this has been successful with revenues rocketing 270 per cent over the Christmas period.

However, business in its own shops fell year-on-year, and its Easter trading will be curtailed by its strategic decision not to sully the brand by limiting availability of its Easter eggs in other stores that might have discounted them.

In the last week alone, enduring bid suspects Laura Ashley, Austin Reed and JJB Sports announced dismal results. Any one of them could also be put into play.

Returns from out-and-out property companies are also likely to remain excellent. Top five property company Hammerson is often tipped by analysts. Nestling just outside the FTSE 100, it offers that old trick of buying a share before it enters a big index, when demand from tracker funds surges.

Trading at net asset value, its £4bn portfolio includes 15 shopping centres and 11 retail parks. It is best known for its development of Birmingham's Bullring shopping centre.

But the huge attraction is that Hammerson's valuations are conservative. It has not fully factored in planning consents in its retail developments, nor reflected the rally in its retail warehousing, where the tenant mix is improving and rents are rising.

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