WHEB Commentary

Tim Dieppe

Rise in corporate activity underlines long-term value


One of our long term holdings in the fund has confirmed that they are in discussions with another company which may lead to a takeover offer. Elster is a smart meter company which manufactures gas, electricity and water meters and has strong market positions in their industry. The UK company Melrose is reported to be considering whether to make an offer for the company, and there are rumoured to be other companies potentially offering competing approaches. Takeover approaches like this one are an indicator of high levels of confidence by the acquiring company which contrasts sharply with investors’ worries about the economy and possible breakup of the euro. Also in our fund, German health company Fresenius is acquiring the hospital operator Rhoen-Klinikum, and US dialysis service provider Davita is acquiring HealthCare Partners.

At approximately US$2bn, Elster is a typical sized holding for our fund and represents the sort of acquisition that many larger companies are keen to make. These mid-cap companies are small enough to be gobbled up, but large enough to make a difference, particularly where they’re offering long term growth opportunities.

A recent FT article highlights that hostile takeover bids are up 86% on last year and now at the highest levels since 2008. Willingness to make hostile approaches reflects a high confidence expressed by management as well as strong balance sheets and depressed stock-market valuations. Hostile
approaches are high risk and do not work where there is a controlling stake in a company which is the case with Elster. Corporations are also often longer term investors looking at strategic opportunities to acquire high quality assets. This trend in corporate activity is an encouraging one for investors
such as ourselves who are willing to take similarly longer term approach to investment.

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