THE INVESTMENT COLUMN: Lean pickings for investors looking for bid targets
Saturday 09 March 1996
Conditions remain fertile for further moves in this area. The industry remains highly fragmented. Market shares of the leading groups are bunched between 2 and 5 per cent. The firepower is there too. Not all balance sheets are stretched: Novartis, the company to be formed from the merger of Ciba and Sandoz, will kick off life with a dowry of SFr15.4bn (pounds 8.4bn) net cash and securities. Its Swiss rival, Roche, has a strong balance sheet. Both are potential predators, but, despite the excitement, UK investors looking to spot their targets may find the pickings are lean.
For a start, the numbers of British prey have diminished after last year's takeover of Wellcome by Glaxo and Fisons by Rhone-Poulenc Rorer. Shares in Zeneca, the last middle-sized British group, have rocketed to an all- time peak on the speculation. But it now looks expensive. Cost savings might be dwarfed by goodwill write-offs. If Roche wanted to do a deal, it is likely it would have to be done as a friendly merger and Zeneca made clear on Thursday that it would be reluctant to come to the altar voluntarily.
That is not a reason to sell the shares, however. Given its strong portfolio of growth products, Zeneca remains attractive. An agreed marriage with SmithKline Beecham or Glaxo Wellcome, still heavily indebted as a result of previous corporate moves, could give an inexpensive yet substantial kicker to earnings in the future.
The other sector which has been exciting interest from speculators is media. Big deals on Wall Street, such as Disney's link-up with ABC/Capital Cities, have highlighted the undervaluations of similar UK stocks. But what has really lit a fire under the sector is the new broadcasting bill, which is set to replace the limit on the number of ITV franchises any one company can hold with a 15 per cent cap on its share of the television audience. NatWest Securities believes the industry could consolidate into three players by the end of the year and just one by the end of the decade. That leaves smaller players looking vulnerable. Yorkshire Tyne Tees, where Granada owns 25 per cent, and HTV, which could be snapped up by the MAI-United News grouping, look ripe.
However, Carlton, the London and Midlands television franchise holder, is the shark in this pool of tiddlers.
Elsewhere in the wider entertainment sector, EMI, with its lucrative list of recording stars and music rights, looks a sitting duck when it is demerged later this year by Thorn-EMI. The merchant bankers have also clearly been running their slide rules over Pearson, which is an obvious break-up candidate with its amorphous mix of merchant banking to theme parks. Bidders for both of these are likely to come from outside the UK, with Disney, Rupert Murdoch's News Corporation, Reuters and Sony all possible candidates.
Ladbroke and Rank, two of the tired old men of the leisure sector, could also be broken up with relative ease, although some of the assets might be hard to sell. More juicy would be JD Wetherspoon and Regent Inns, pub groups spawned of the Government's beer orders. Parts of all four of these groups would fit well with either Bass or Whitbread, where leisure is seen as a growing part of the business.
Other sectors which have seen some of the hottest takeover action in the past year are still bubbling away, albeit at lower levels. Royal Bank of Scotland could prove vulnerable to HSBC as the Chinese takeover of its Hong Kong heartland approaches next year. Its Edinburgh neighbour, the Bank of Scotland could be similarly placed, but investors may miss out on other takeovers in the financial services industry. The targets of the budding financial conglomerates seem to have shifted to mutuals like building societies and life companies, where Clerical Medical and Scottish Amicable could soon succumb to bids.
Utilities went through a massive restructuring last year and it is hard to see that being repeated in 1996, despite Wessex Water's indication that it is ready to move on South West Water. At the fringes, there could be link-ups between adjacent water groups, releasing benefits of scale from shared overheads, but the industry continues to absorb large quantities of cash, making it difficult for debt-financed bids to succeed.
The problem for investors is to spot any remaining value among the speculation. With shares just below record highs, it is difficult to find any corners of the market which remain untouched by the fever.
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