A string of large Australian companies have been earmarked by Credit Suisse as potential takeover targets as the stockbroker predicts a step-up in merger and acquisition activity because of generally strong balance sheets, solid cash flow and capital markets around the world being ready to finance deals.

The potential M&A candidates include financial services group Challenger, petrol giant Caltex, media company Nine Entertainment, recovering oil and gas company Santos and coal group Whitehaven.

Credit Suisse analyst Hasan Tevfik said Australia’s superannuation system, with its dedicated pool of funds flowing in from the Superannuation Guarantee, was a net buyer of about $20 billion in equities each year and was a big reason for the strong demand for Australian stocks at a time when capital raisings and new floats are shrinking.

He said Australia’s equity supply was weak, but equity demand was strong.

There was an extra $13 billion in new equity raised in 2017, but he expects even less in 2018. “The long-term average level of net equity-supply has been closer to $40 billion,” he said.

‘Music is still on’ for M&A

But there would also be another large force at play, as takeovers triggered more “retirements” of equity. The conditions are right for more deals to follow major buyout proposals, such as Unibail-Rodamco’s acquisition of shopping centre giant Westfield.

“The music is still on for the Aussie M&A cycle,” Mr Tevfik said. Increasing corporate confidence would also help fuel more deals.
The stockbroking house compiled a list of 31 ASX-listed companies in total, many of which had been in the sights of potential predators or the subject of speculation.

“We think the ruler has been run over all these companies.”

Among the other potential takeover targets are ailing Ardent Leisure, Australia’s biggest cement company Adelaide Brighton and paint company Dulux.

Adelaide Brighton already has a major shareholder on its register in Melbourne’s Barro family, which used creep provisions to lift its stake over 40 per cent two weeks ago.

Agricultural chemicals company Nufarm, energy company Origin Energy, Primary Health Care and graphite miner Syrah Resources are also earmarked as likely targets.

Pipelines company APA and vitamins group Blackmores are also singled out as potential buyout plays.

Blackmores, although it has a large shareholder in Marcus Blackmore, is tipped as a potential target for a Chinese buyer because of its strong brand and “fast growth in China”, even though it has had some short-term hiccups in its Australian business.

Chinese buyers are also a possibility for a buyout of Penfolds owner Treasury Wines, which would make a “strategic fit” for a Chinese company with deep pockets as sales of its premium brands soar in that country. State-owned COFCO Group is a potential buyer, according to Credit Suisse. But the share price surge to beyond $17 makes it an expensive bite.

Media companies are sprinkled right through Credit Suisse’s list of 31 takeover target potentials as traditional business models come under serious pressure and regulatory changes open up the possibilities for companies to join forces. Nine Entertainment, Seven West, Southern Cross and Fairfax Media, publisher of The Australian Financial Review, are all among the potential M&A targets.

Extracted from AFR.