takeover bid strategy - a very interesting read...

Should you chase the takeover targets?
In 2004 it seemed that every second high-profile firm around the world was either taking a firm over or being taken over itself. In the US, Cingular bought AT&T Wireless, for example, and, in the UK, Banco Santander bought Abbey National, and the on-off saga of Marks & Spencer (M&S) occupied column inches for weeks on end. But according to the investment bankers, we havent seen anything yet. Theres no reason to doubt their prediction. As John Plender points out in the FT, they know at first hand what is in the merger and acquisition (M&A) pipeline. And if they are right, its excellent news for investors: share prices tend to soar when bids are announced.

Take the case of Aggregate Industries. Three months ago, Sandy Cross of Williams de Broe tipped the building materials firm in MoneyWeek at 95p, saying that it looked a manageable size for a predator. He was right. This week, Switzerlands Holcim said it intends to bid $1.78bn or 138p a share for Aggregate Industries. Today, the shares are trading at around 145p - anyone who bought in November is sitting on a 53% gain.

So if this really is the start of the year of the deal, wheres the best place for investors to place their bets? There is scope for consolidation in all sorts of sectors, from telecoms equipment to travel, all over Europe, but in the UK it is the retail sector that is getting all the attention. Analysts have long been warning that British retailers were going to have a nasty end to 2004 and a worse beginning to 2005, and Christmas seems to have been every bit as poor as the pessimists feared, says Chris Brown-Humes, also in the FT. Higher interest rates, a weak housing market, record levels of personal debt, higher utility bills and increased public transport costs are all squeezing the ability and desire of households to keep spending. The result? A lot of our retailers are suffering and that could make them easy pickings for predators. Indeed, one of the only things supporting retailers share prices right now is the prospect of takeover activity.
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Venture capitalists are still on the prowl, as is the Icelandic retailer Baugur, and Tesco and Asda might make a move on a rival. All of which leaves investors simply having to guess who the targets will be.

Betting on who they might be has become the latest City investment craze, says Simon Nixon on www.Breakingviews.com. But it isnt hard. M&S and JJB Sports saw their share prices rise even as they announced rubbish numbers as investors calculated this increased the likelihood of a takeover. Perhaps Philip Green will comes back and have another go at M&S.

Other possible targets include J Sainsbury, N Brown, MFI, Matalan and French Connection. But is betting on these firms wise? Debt is now cheap and plentiful, so potential bidders are awash with cash, but if the spending downturn gathers pace, that will change and takeovers will suddenly be harder to finance. And not all the dogs of the retail sector will be rescued by a bid. Some will just go bust instead. As Simon Watkins points out in The Mail on Sunday, some already have. Since Christmas, Scottish carpet maker Stoddard International has gone into administration because of tough trading at its key customer Allied Carpets, and fashion chain Pilot went into receivership as sales fell. These were both private companies, but the lesson is clear. If you are chasing takeover targets, make sure you go for firms that will survive even if they are forced to go it alone.

Woolworths is every inch a major takeover and worth following, a great opportunity if it materialises, the time is ripe once again -58p was recent target price.
remember Doing your research reaps rewards.

partridge - theyre 8p now - are you saying they could double oin price ?

No - personally I think any bidder will have negotiating strength and offer no premium, might even go in lower. WLW has a lot of shops in good locations, but who knows what the rents are and many may well be liabilities. Cash is king and just don't think WLW has access to enough to turn the business round. Could be wrong of course.....

WLW are unlikely to miss a simple 1/4s rental .... more important is when the rentals are due for renewal and/or when the leases expire

cynic - you are confusing asset value of the leases and daily cash flow. With over 800 shops a "simple" quarters rent will be a lot of dosh and if the cash is not available it matters not one jot how much the leases are worth. Not suggesting they do not have the money, but not beyond the realms of possibility imo. Cynically (sorry!) speaking, bankers more likely to pull the plug on retailers before the March quarter rents due i.e after peak selling season over Xmas.

Rumour in the city is action on the way and soon.

Probably a bid at below the current sp.

feathered friend - i don't think WLW are exactly living hand to mouth or in any danger of breaching their banking covenants ....... nor do i believe "action on the way and soon"!

You may be right cynic, but with 2007/8 final results they announced change to asset based financing, which was imo likely to have been insisted upon by the banks (nothing worse than calling an overdraft in and finding all the assets have been disposed of). Main assets mentioned were EUK debtors and group stock - end of Jan these were just over 440M and just over 300M respectively, with maximum facility available of 350M.At the time, borrowings were 162M and they had some 30M cash. So far looks fine. Hope you have not yet fallen asleep, but I am fascinated by numbers. Let us assume that bank formula is to make available max 60% of debtors and 30% of stock. Then look at first half of year to end Jan 2009 - IMS stated that group sales for first 19 weeks were down about 2% and margins also lower. Can't believe things have got better in last couple of months, so seems a reasonable assumption therefore that operating cash flow worse than previous year, when they were negative 83M in the first half. Add that to gross borrowings 162m and you get 245M. Lower seasonal level of activity left debtors at half year end 236M and stocks were 420M. That would give borrowing limit of 142M on the debtors and 125M on stocks a total of 267M. Getting a bit too close for comfort. I also find it revealing that the deal to sell the four stores to Waitrose was concluded in the third week of June, a few days before the rent quarter day - maybe a short term bridging loan needed because they were tight on original lending formula? Fairly crude analysis and all conjecture on my part, but you will appreciate my obsession with cash when looking at companies and WLW shouts at me as being short of it. Happy to be proved wrong - and especially so for holders of the stock.

I sold my shares this morning at .08pence a share. I may buy them back if they fall back to .0748p.

our own experience of invoice discounting, and we are just a small though profitable company, is that we get 75% of book debt ...... i also suspect that WLW pay their suppliers at 90 days and maybe even 120, so your number crunching may be somewhat pessimistic

Agree my arithmetic was indeed pessimistic, but tried to demonstrate a point. Your own situation likely to be much simpler (fewer debtors, easily monitored - and your business less likely than WLW to hit the rocks!). They also have to deal with a raft of banks rather than just one, who you probably know and get on with quite well!

we have 200+ clients all over the world, with almost none in UK

what do you do for a job?

Sells golf clubs!

Todays end of day action was all part of the prelude to next weeks action. Expect weekend press. Enjoy.

more like sells "lake" golf balls!

I just love a little cynical honesty.

I'm in the market for a new set of left handed ones, I'm right handed but I find I play better if I use the club backwards.

Woolworths what is the first thing that comes to mindhhhhmmmm. spandau ballet.the Poseidon adventure.plastic trashstainless steel useless implementsironing boards that wobble.clothes for the blind sticky sweets and dented roses tins. Wilted plants. And creosote..shall I invest?

just face the other way!
btw, am actually in a shipping/chemical related industry

The start of the weekend press I promised you all
http://www.ft.com/cms/s/0/49e9415c-7b7a-11dd-b839-000077b07658.html?nclick_check=1

More to come on Sunday.