Owning shares in a company that becomes a takeover target can be rewarding for investors. Giant firms like to swallow smaller ones to pursue growth in a less risky way, and private equity players may be on the prowl, too, looking for aquisitions.
For the investor, the icing on the cake is usually a healthy premium above the pre-bid share price.
But betting on a takeover should not be the sole reason to hold a stock; investors should keep an eye on the company's fundamentals as well.
We asked three money managers for their picks among small-company stocks with takeover potential.
Michael Waring, Galileo Global Equity Advisors Inc., Toronto
- The pick: WPT Industrial Real Estate Investment Trust (WIR.U-TSX)
- Close at press time: $11.22 a unit (U.S.)
- 52-week range: $9 to $12.20 a share
This Canadian-listed REIT, which focuses on industrial real estate in the United States, is a unique play on e-commerce – those companies need big warehouses – and a growing economy, says Mr. Waring, who oversees the Galileo High Income Plus Fund. The REIT trades in U.S. dollars and pays a U.S.-dollar dividend that yields more than 6 per cent. Alberta Investment Management Corp. bought a 33-per-cent stake in WPT this year after the REIT scrapped a strategic review to find a potential buyer. With its balance sheet reloaded after a recent financing, WPT is looking for additional warehouse properties, which "will bode well" for this stock, Mr. Waring said. When this REIT's market value grows closer to the $750-million range, it could garner attention from larger U.S. players, he said. Comparable U.S. REITS recently traded at about 13-per-cent premium to WPT, but they are, of course,
a lot bigger, he noted. WPT
could hit $14 a unit over the coming year as long as U.S. interest rates don't rise sharply, he suggested.
- The pick: Crew Energy Inc. (CR-TSX)
- Close at press time: $6.63 a share
- 52-week range: $2.65 to $7.28 a share
With its big exposure to the Montney liquids-rich, shale-gas play in British Columbia, the Calgary energy firm is a potential takeover candidate, says Mr. Waring. "The liquids put the spin on the economics. The price of the liquids is very high relative to what they receive for natural gas." Analysts suggest that Crew, which is trying to unload a heavy-oil property to become a pure Montney play, could get $75-million to $80-million from a sale, he added. Major energy players, such as Shell and Chevron, tend to be on the fringes in the Montney, he noted. "If a major would like to get involved in a bigger way … there are only a handful of companies available to be taken over." Crew's stock, which has rallied amid rising gas prices, could hit $11 to $12 a share over the next year, and $15 a share longer term, he said. Assuming an environment of rising commodity prices, Crew could raise production to 60,000 barrels a day by 2018 from 22,000 now, he added.
David Barr, PenderFund Capital Management Ltd., Vancouver
- The pick: Inscape Corp. (INQ-TSX)
- Close at press time: $3.20 a share
- 52-week range: $2.71 to $3.27 a share
Sales of Inscape's stylish office furniture have gained traction since it partnered with U.S.-based retailer West Elm, says David Barr, who runs Pender Small Cap Opportunities Fund. Ontario-based Inscape saw sales jump 60 per cent in the latest quarter compared with a year earlier. "We view 30- to 50-per-cent growth for the next couple of years a very achievable number," he said. West Elm, known for residential furniture, is a unit of Williams-Sonoma Inc. Inscape, which has no debt and about $13.5-million in cash and working capital, is a potential takeover target for West Elm or furniture makers such as Steelcase Inc. and Herman Miller Inc., he suggested. Inscape's stock is "cheap on most metrics," while its West Elm relationship could be a real inflection point for the company, he added.
- The pick: Maxim Power Corp. (MXG-TSX)
- Close at press time: $3.15 a share
- 52-week range: $2.34 to $3.32 a share
Shares of this Calgary-based independent power producer have struggled but are now attractive as a liquidation play, says Mr. Barr. Maxim, of which insiders own a sizable chunk of shares, operates power plants in Alberta, the United States and France. In 2012, it announced a strategic review to maximize the value of its foreign units, but regulatory problems scuttled a deal to sell its U.S. assets. Maxim chairman Bruce Chernoff, a major shareholder who was appointed interim CEO last summer, is now "probably highly motivated to sell the assets and wind it up," Mr. Barr said. Last month, Maxim struck a deal to sell its French assets. Recently, Maxim agreed to a deal with a U.S. energy regulator that could pave the way for a buyer, he added. "We think the company trades at a substantial discount to what the company could sell its assets for. We think Maxim is worth about $5 a share."
Don Walker, Norrep Capital Management Ltd., Calgary
- The pick: PFB Corp. (PFB-TSX)
- Close at press time: $8.52 a share
- 52-week range: $7.76 to $10.66 a share
Shares of this Calgary-based maker of resin-based insulation products have potential as the company takes market share from traditional fiberglass-insulation firms, says Mr. Walker, who oversees the Norrep Entrepreneurs fund. "This alternative product has a better thermal rating [than fiberglass] and is cheaper to install." PFB, which sells its product through Home Depot in Canada, has also begun penetrating the U.S. market via the same retailer. U.S. revenue this year helped offset declining sales in Alberta's slowing economy, he said. "Next year, we should get back to a growth year." PFB will likely finish 2017 with no long-term debt and about $30-million in cash, which is about half of its market value, he noted. Private equity players are likely to circle PFB because it generates a lot of cash and has a cheap valuation, he said. "PFB trades at just over tangible book value, which is around $6.70 a share."
- The pick: Velan Inc. (VLN-TSX)
- Close at press time: $18 a share
- 52-week range: $13.57 to $19.20 a share
Shares of this Montreal-based maker of industrial valves are trading cheaply amid a cyclical downturn, says Mr. Walker. Velan, which operates plants in North America, Europe and Asia, has seen its business hurt by falling oil prices. Its valves are sold mostly to the oil, petrochemical and power-generation industries. The firm, which is 70-per-cent owned by the Velan family, hired an outsider last year as president. The company has a strong balance sheet with more than $100-million in net cash. It is becoming leaner and more efficient and will be in a stronger position operationally when end markets recover, he said. Velan's stock trades below tangible book value, which is about $19 a share, but that number is "heavily understated" because its land and buildings are fully depreciated, he said. "Book value is likely north of $25 a share. The family is still involved in the company, so privatizing [Velan] is the more probable scenario."