18 September, 2015

Having last week discussed supermarket Morrison (MRW) as most likely takeover candidate in the UK grocery sector, the Mergers & Acquisitions (M&A) train kept puffing along this week with news that Stella Artois and Budweiser owner AB Inbev (ABI) had approached London-listed brewer of Fosters and Peroni SABMiller (SAB) about a $75bn takeover. That would mean a $250bn ‘beer-hemoth’ that would easily control 70% of the global beer market! This is something that anti-trust competition regulators are sure to have something to say about, but some divestments may be all that is needed to put them at ease. Shares in SAB spiked sharply on the news, putting on an impressive 24% at one point. Having been mooted for years, the deal is no longer on ice.

Unfortunately those 24% gains have been and gone, the shares now waiting patiently for the deal to be confirmed and closed (or possibly abandoned; it does happen). However, I think it’s worth highlighting that M&A is an extremely lucrative area for both investment and trading. This stems from the almost religious payment of a premium (typically circa. 25%) over the current share price by the predator in order to convince investors to give up their shares and control of the prey (and right to future profits). It doesn’t always happen, especially if the predator thinks it is doing prey shareholders in a troubled problem company a favour by giving them an exit strategy, but more often than not it is the case.

Part of our research service is to keep an eye on and record cases of speculation relating to major UK-listed stocks so our clients can decide whether investment or trading opportunities exist. The typical trade is to be short/sell the predator (acquisition risk, cost involved shares should fall) and long/buy the prey (should receive premium, shares should rise). However, our list can also be used to avoid trading certain names that might be prone to speculation or already involved in a deal situation.

In some cases speculation comes and goes with little or no reaction. In others the reaction results big share price moves. It can be that speculation is a regular occurrence with the same predator mentioned again and again. Some deals succeed while some fail. Some are revived by the same or a new predator. It’s an exciting area to keep an eye on with something somewhere happening all the time, and activity in almost all sectors. To make sure you are in a position to profit from the next SABMiller and its 24% share price move, join those already there by getting on our research list now. Cheers!

Mike van Dulken, Head of Research