UK: Prey for today.

UK: Prey for today. - If the price is right, even multi-billion pound companies are open to attack. We profile the 10 most vulnerable.

by James Smith.
Last Updated: 31 Aug 2010

If the price is right, even multi-billion pound companies are open to attack. We profile the 10 most vulnerable.

A bid needs a bidder, and when the wherewithal runs into the billion-pounds-and-above territory, they're in short supply. For that reason, the odds on any of the following FTSE-350 companies being taken over in the next few months are very long indeed. But what is a fair bet is that in merchant bankers' dining rooms, when talk turns to takeovers, these names are currently heard more frequently than others.

There are two categories of candidate. Standard Chartered, Smith & Nephew and Southern Electric are all making a decent fist of managing their businesses.

They look large from a UK standpoint but in a global context, they're minnows. Each could conceivably make a tasty feast for a hungry giant in the same field. The rest are all straightforward underperformers, classic bid targets for ambitious companies which reckon they could make more money from the same assets.

Obviously there's more subjectivity than objectivity in our selection, but the latter isn't totally absent. We expected to have at least one food retailer on the list, because the Tesco/Sainsbury stand-off looks so unstable. But figuring out which of the majors or minors will be the first to fall is no easy game. If nobody wants Somerfield on a price/earnings ratio of six, maybe the action is going to be among the majors. Perhaps Galileo's aborted assault on the Co-op will ultimately put the skids under its supermarkets. At any rate, being objective about it, we haven't a clue how that one is going to pan out, so no food retailer.

Some of our selections - one might mention P&O and Southern Electric - are everybody's takeover favourites. Others are past that phase and now look rather pricey. Some analysts believe that so much value has been destroyed at United Biscuits, for example, that it is a sell even at their current, depressed price. For other companies the current state of vulnerability is due to other factors: with Rank and Securicor, for example, long-standing technical obstacles which have deterred bids in the past, have now disappeared.

Of course, few companies are entitled to think they are immune from the threat of takeover, but in the following cases the possibility should be at the forefront of incumbent managers' minds.

Albert Fisher, market capitalisation £276 million

The small fruit and veg wholesaler - turned into an international food group by Tony Millar in the 1980s - isn't what it was after the share price collapsed and he was ousted in 1992. Under Millar's successor Stephen Wallis, the businesses responsible for half of the 1992 turnover have been sold. But this is no break-up operation. Infill purchases for the other half have kept Fisher as busy as ever acquisition-wise. But shareholders haven't seen anything out of it yet. Write-off on the Millar deals have been costly and earnings are still 30% below their 1992 level. The shares have been sent to Coventry: they pay the highest yield in the FT-SE 350.

But a gentle recovery of earnings may be in prospect. The Wallis workover has had its hiccups, notably in the US lettuce market, but probably hasn't been a total waste of time, in which case this stock may be too cheap to stay independent.

English China Clays, market capitalisation £643 million

In the early 1990s under Andrew Teare (now at Rank), ECC appeared to have the bit between its teeth. But now it seems to be choking on it.

The main problem has been Calgon, a US speciality chemicals business acquired for $310 million in 1993. Bringing Calgon's water and paper chemicals under the same roof as ECC's paper-coating minerals promised great things.

Instead, Calgon profits sank steadily from over $24 million to under $7 million in 1996. And ECC's minerals business had a terrible 1996 - operating profits slumped from £100 million to £70 million and technological changes in its customer base suggested a steep decrease in future profitability.

But the share price reaction - it has halved since 1995 - more than accommodates these difficulties and attributes next to nothing to supposed cost savings of £30 million a year by 1998. A bidder could acquire a 25-year reserve of a key mineral for less than annual sales.

Hambros, market capitalisation £394 million

This summer, Hambros installs its first non-family chairman since it was founded in 1839. The bank, which has a good deal more name recognition than its size justifies, does all the things traditional merchant banks do, from dealing in eurobonds to private client banking. Its eurobond ascendancy was long ago captured by more serious banks and Hambros has never become a lead player in any other segment, although it has done a good job of hanging in there. But the long-term financial performance has been pathetic. Nonetheless, the package as a whole, including its scarcity value, would make an attractive buy to a foreign bank wanting an entree into the London markets. Hambros's huge bet on estate agency is finally coming good: 52% subsidiary Hambro Countrywide is now worth more than the parent. Oriental troublemaker and 3% shareholder, Regent Pacific, has not so far succeeded in putting Hambros into play, but its case will ultimately carry through.

P&O, market capitalisation £3.7 billion

Lord Sterling recently discovered a radical new enthusiasm for pruning.

Last year he unloaded £400 million of assets and the programme continues, including Bovis Homes, which should fetch up to £300 million in the autumn.

This has probably saved him from retiring before the cruise ship Canberra, which goes this year. But he may yet follow in its final wake. It's years since P&O's huge collection of assets earned their keep and they've a long way to go yet. The dividend has been static since 1992 and there's no lift on the horizon. If freight shipping had been the only underperformer, Sterling might have been forgiven, but continuing to expand the £1.7 billion property portfolio right up to last year was a wilful gesture. P&O's trophy assets such as Cruises, Bovis Construction and Earls Court/Olympia need to be unbundled and the proceeds applied to improving its ballast. Sterling probably couldn't contemplate this but for a well-endowed break-up artist ...

Rank, market capitalisation £3.7 billion

For 25 years, Rank bumbled along magnificently knowing its 49% stake in Rank Xerox (RX), the overseas operations of Xerox, shielded it from takeover. RX represented at least half Rank's stock market value. 'If you want to bid for Rank, make an offer to Xerox,' said Michael Gifford, the previous chief executive. Under Gifford, the performance of Rank's wholly owned businesses moved from miserable to merely inadequate. It tended to make showy and expensive investments such as the purchase of Mecca and the £100 million Oasis holiday village in the Lake District.

New man Andrew Teare has tidied up Rank's portfolio and will sell the remaining 20% RX stake. But he seems set on a diverse capital expenditure programme totalling £1.6 billion and his acquisition of pub company Tom Cobleigh last year for £98 million suggests old habits die hard. The share price is well down since he arrived.

Securicor, market capitalisation £1.7 billion

In February, stockbrokers ABN AMRO Hoare Govett valued Securicor's 40% stake in Cellnet at £1.8 billion. They've pulled that back since Cellnet hit choppy waters and its boss left. All the same, with the whole of Securicor valued by the stock market at £1.7 billion, there's a value discrepancy somewhere. The fact is that the fabulous success of Securicor's Cellnet investment (cost, £70 million) has papered over mediocre performance in the security and parcels businesses (combined sales, £900 million) and repeated losses in the communications division which takes in a raft of 'promising' but rarely profitable technology companies scattered across the globe. The value discrepancy was always present, but so too was a very complicated corporate structure with two quoted companies, and the joker of capital gains tax on the Cellnet stake. But last year, Securicor neatened its structure and got useful Inland Revenue tax clearances on the Cellnet capital gains. A bid cum Cellnet stake demerger could unlock the other businesses cheaply.

Smith & Nephew, market capitalisation £1.9 billion

Analysts view S&N as a good player in tough markets. Some 41% of sales are in America, where chronic downwards pressure on medical treatment costs has checked group earnings. The share price has hardly moved since 1993. S&N's wide range of medical kit, from joint implants via keyhole surgery systems to wound dressings, would make an attractive add-on for one of the big US medical firms seeking economies of scale by widening the product range it sells into US hospitals. The buyer would recoup a worthwhile fraction of its outlay by selling S&N's consumer division to a toiletries multinational. The $64,000 question is whether Dermagraft, a joint venture in bio-engineered skin replacement, and potentially a minor Zantac, is worth the premium it has injected into the shares.

Southern Electric, market capitalisation £2 billion

It's not by design that Southern Electric is the last of its species, the independent regional electricity company (REC). After failing to link with other RECs, 18 months ago it recommended shareholders to accept an offer from electricity generator National Power. The Government nixed the deal. On the rebound the company tried to buy Southern Water but was outbid by Scottish Power. A rejigging of the board after the deal was aborted gave it a slightly punchier look. Glaswegian chief executive Jim Forbes insists that the company is not for sale. But he needs to come up with something exciting fast if shareholders are not to say yes to the first US energy company which marches up with a cheque for £2.4 billion.

Standard Chartered, market capitalisation £9.7 billion

It's 11 years since the bid by Lloyds Bank for Standard Chartered sparked one of the most colourful defences of modern times. Standard lined up a queue of loyal Asian billionaires, succoured for years by its lending officers, to preserve its independence. It no doubt helped that Lloyds had spotted some truly undervalued assets. The share price doubled and stayed up long after the bid lapsed. Standard couldn't repeat the defence now - it is not that cheap any more, although it was in the early 1990s as it suffered calamity after calamity (remember the Bombay Stock Exchange scandals?). It's not the same bank, either. What's driven the share price in recent years is the rapid expansion of its retail banking business as Asia's middle classes laid their hands on some serious disposable income. With 800 offices in 70 countries focused on sexy south-east Asia, Standard would be an attractive add-on to a well-heeled and globally-thinking, probably US, bank.

United Biscuits, market capitalisation £1.2 billion

Fund manager PDFM thinks equities could collapse and is therefore way underweight - except in UB, of which it owns 23%. Under Sir Hector (now Lord) Laing, UB was highly regarded, if stodgy. In 1990 he left hand-picked successor Eric Nicoli in charge and sold his portfolio of shares to reinvest in UB. A bad decision. UB's problem is that everywhere outside the UK, it's the number two or three and the number ones, principally Nabisco and Pepsi (big in salty snacks worldwide), have been pummelling it into the ground. US and Spanish operations were sold with monumental write-offs after getting into severe losses. Laing's final deal, buying the number two UK frozen food outfit Ross, turned into a fine mess. Meanwhile UB's sole number one slot, UK biscuits, has seen market share fall from 49% to 34%. March's results showed the situation had stabilised. Now would be the appropriate time for a mega food multinational to reach for the McVitie's.

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