What are we looking for?
Good takeover candidates.
Canadian companies were just not inclined to acquire last year. Stricken by low commodity prices, the resource sector in particular stood out for its lack of deal-making.
While the first quarter was still weak in terms of Canadian mergers and acquisitions, there are signs of a rebound. M&A activity is reportedly heating up in the oil patch as well as the mining sector.
"Although the numbers for this quarter are not great, strength in energy and a potential resurgence in mining suggest that M&A activity may finally be looking at the upswing we've been anticipating for some time," PricewaterhouseCoopers said in a recent report.
So, we went looking for Canadian-listed companies that might make for tempting targets.
How did we do it?
The primary criterion we screened for was an attractive ratio of enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA).
(EV is the market value of all its shares plus the company's net debt.)
Also known as the "takeover multiple," a low EV/EBITDA ratio could signal that a company is undervalued. We limited our search to stocks with an EV/EBITDA of eight or lower.
We also wanted to weed out the smaller companies, so market capitalization had to be at least $100-million.
Next, we filtered out stocks that had a debt-to-equity ratio of greater than 50 per cent.
Finally, to help identify stocks that might be underpriced, we screened for those that were priced at least 30 per cent lower than their 52-week highs.
What did we find?
Unsurprisingly, the resulting list is heavily weighted in resource stocks. Mining companies make up almost two-thirds of the 17 Canadian stocks that made the list. There are also a handful of beaten-down energy companies. And there are two outliers – Transat A.T. Inc. and Reitmans Canada Ltd. – both of which have spooked investors with earnings disappointments.
While this list of stocks might prove useful as a starting point, investors should do their own research in determining which might actually be ripe for takeover.