Look out behind you! The takeover train is about to hit

Rejecting opportunistic foreign takeovers can create winners ... just ask Treasury Wines.

Australia is now a sitting duck in a global torrent of takeover ­activity. We’ve got the perfect recipe for the marauding multinational desperate to ratchet up revenues in a tepid global ­economy.

The question is whether as ­investors we win or lose.

The opportunistic bid this week from private equity interests linked with the American former boss of Santos — John ­Ellice-Flint — for the Adelaide-based oil and gas company is the perfect example: Santos has turned down the offer at first blush but the story is far from over with more bids expected.

Certainly the shareholders in Treasury Wines would surely recommend to the Santos shareholders they should not offer up their assets too quickly.

Treasury Wines is our last major listed wine company — the vehicle behind Penfolds, Wolflblass, Rosemount and many more) — and it just hit an all-time high of $7.30 a few days ago — this is a tremendous price (see graph).

What’s more, Treasury has reached new heights primarily because it has been a predator aggressively and successfully ­bidding for the wine assets of drinks giant Diageo. Some in the market are complaining Treasury has paid too much, if so the majority disagree because the stock gained 17 per cent on the day — Monday October 19 — the Diageo deal was announced.

Treasury is a sterling example of the realities behind the takeover frenzy sweeping the globe — only last August it rejected offers from private equity group KKR at $5.20 a share.

If TWE shareholders had said yes to the “takeover premiums” on offer at that time they would surely regret it now.

No wonder Santos has held tight — this offshore bid from a group with links to Brunei and the UAE comes when the oil price is half what it was a few year ago. For professional speculators takeover are all very well — a quick profit is on offer for flipping a stock. But for retail investors there is very little chance — statistically — that you will successfully pick a takeover target.

The list of potential takeover candidates in the Australian ­market is simply immense — your chance of buying the right one would be about the same as picking a winner in the Melbourne Cup.

Remember most specialist “takeover funds” do not go around buying stocks hoping they will get an offer, rather they make their money from trading around successive bids, which move the share price whether the deal gets done or not.

On the other hand, for the ­retail investor buying a stock that is a good investment — which is also a well known takeover target — is by no means a problem and may offer the prospect — if slim — of further upside.

So which stocks are already well known targets? Among the major names there is Transurban and Woolworths (yes, the whole company, a deal made even more possible if the Big W unit is carved off in a separate deal which has been widely rumoured.)

However, it is among small to medium stocks where there are possibilities that offer more upside promise: among this group would be SMS Technology and Mortgage Choice.

If you need evidence on just how hard it is to see a takeover offer coming down the line it’s worth noting that while Transurban and Mortgage Choice have been takeover targets for years very few in the market had “called” the takeovers of Toll Holdings (by Japan Post) or David Jones (By South Africa’s Woolworths). Nonetheless, those two deals were among the biggest takeovers we have seen in recent times.

For the wider market the truth is that the constant removal of strong companies is bad news: the easy takeover of Toll Holdings recently by Japan Post is a good example that has endless ­precedents going back through the decades from Fosters, back to Arnotts all the way back to FJ Holden if you want to widen the lens.

In a low-growth low interest rate market takeovers will never stop. Accepting that reality, what we need is more aggression outward bound! Treasury Wines in moving from target to predator inside a few months is encouraging.

The constant expansion by ­judicious takeovers in the appropriate space by CSL has made it that rarest of things — an ASX-listed global champion. As investors we’d like to see more of that and less of dominoes falling over all too easily.

James Kirby is managing editor of eurekareport