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At Belvedere, we manage portfolios which for the most part are relatively conservative, and invested across a range of companies that have a favourable outlook.  From time to time specific trends occur in the market which can present opportunities for shorter term gains, albeit with risk.  What has been increasing is the number of attempted takeovers leading to significant gain for current investors.

In most cases, the share price will start to move up on higher volumes of trading before the actual bid.  There can be a rumour, as happened with Healthscope Hospitals; that smoke lead to fire and an offer being made the following week.  It doesn’t always happen so, investors need to be comfortable holding the shares in what could be a problematic company.  That is the risk/reward game.


Healthscope (HSO) – Daily Trading Chart

Very few people have commented upon this increase in takeover offers, most likely as it has not been concentrated in the one sector. The common thread is that the takeover offers are coming for companies that have been completely out of favour and trading at or near multi-year lows.

Consider the takeover offer for Santos, who’s share price had fallen from $12 to under $3 before the offer. That offer for almost $7 has since been knocked back as insufficient!

Healthscope Hospitals suffered a series of profit downgrades and like Santos was carrying high debt levels. The general market had virtually given up on the current management and the stock, when two consortia recognising the value in the hard assets made premium bids.

A cleverly named company, Here There and Everywhere (HT1) has an outdoor advertising and radio division which through a number of management mis-steps saw their share price smashed, only to lead to two competing companies making bids for their outdoor advertising division.  This has caused a 30 per cent jump in the HT1 share price.

And most recently the owner of Sukin, BWX fell from $8 to $4.50 at which point management made a Management Buy-Out bid at $6.60.  It is a solid company on an international growth path which was punished for a slight miss on a recent profit announcement.

The examples differ across industries, however each of the targets were very out of favour with the market which meant that they were so undervalued that they became targets.  At Belvedere, we expect  this to continue.  There has never been more funding for Private Equity firms and we are now seeing international firms compete with local Private Equity firms.  Finance is still very available (and cheap) for such transactions enabling Private Equity to leverage the takeover with a five-year timetable to fix whatever was the issue that had created the low share price.

We have been fortunate enough to have picked some of these opportunities, and are now very focused on identifying the next targets.  Identifying take-over targets is a riskier strategy and requires significant in-depth analysis, as the reason the share prices are down are generally due to high debt levels, management failures, and or industry headwinds.  However, when we allocate a small proportion of a balanced, diversified investment portfolio to potential takeover targets, the upside (if captured) can produce an outperforming portfolio.

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