Betting on a stock that keeps rising is always sweet, but the icing on the cake is the takeover bid from out of the blue.
Well-heeled suitors may pay a sizable premium above the last closing price for companies that hold special allure. It could be a firm that has done the risky footwork acquiring smaller industry players. It could be a company with a compelling niche technology. Or, it could be a business that offers an easy way to build scale.
We asked three portfolio managers for their top picks among stocks with takeover potential.
Rick Ummat, portfolio manager, Jemekk Capital Management Inc., Toronto
- The pick: People Corp. (PEO-X)
- 52-week range: $4.25 to $7.93 a share
This Winnipeg-based provider of group benefits, retirement and human-resource services has made 17 acquisitions but is itself a possible takeover candidate, says Mr. Ummat. Key is its chief executive officer, Laurie Goldberg, who was the chief architect behind Assante Corp.'s sale in 2003 to CI Financial Corp., he noted. (Assante similarly consolidated financial planning firms.) People Corp. could be attractive to the Canadian human-resources firm Morneau Shepell Ltd. or a financial institution looking to get into the benefits space, he said. People will become a more interesting target once its earnings before interest, taxes, depreciation and amortization (EBITDA) reach about $50-million, he added. "It's about half that now." Its revenue has been growing 7 to 10 per cent annually, he said.
- The pick: Boyd Group Income Fund (BYD.UN-TSX)
- 52-week range: $81.76 to $106.94 a share
The operator of collision repair shops is on the acquisition trail across North America, but it will also get a "nice tailwind" from U.S. tax reform, says Mr. Ummat. More than 90 per cent of the revenue at Winnipeg-based Boyd comes from south of the border. Its chief executive officer, Boyd Bulbuck, who has a five-year plan to double the business by 2020, is "on track," Mr. Ummat noted. Boyd Group, the second-largest player in its industry, will be a takeover target someday, he predicted. One possible scenario is privately owned U.S.-based Caliber Collision Centers Inc., the largest industry player, buying Boyd and going public, he said. The resulting firm could then make more acquisitions with stock and debt. It may sound draconian, but bad weather also helps Boyd increase business volume, he added.
Steven Palmer, president of AlphaNorth Asset Management Inc., Toronto
- The pick: BlueOcean NutraSciences Inc. (BOC-X)
- 52-week range: 3 to 42 cents a share
BlueOcean is focused on marketing its exclusively licenced CO2 (carbon dioxide) irrigation technology, which can increase yields of cannabis and vegetable plants, Mr. Palmer says. The technique involves infusing water with CO2 and then spraying it on plants to help them grow faster. The Toronto-based company plans to lease equipment to users. It has begun trials this quarter with cannabis and vegetable growers, but it's the cannabis angle "that I am particularly excited about," he said. BlueOcean has takeover potential because this technology would reduce costs for a cannabis producer and give it an edge over rivals, he said. This business, however, is still under the radar, he said, because BlueOcean has been known for its shrimp-oil business, which it is divesting.
- The pick: Antibe Therapeutics Inc. (ATE-X)
- 52-week range: 8 to 33 cents a share
The lead drug of this Toronto-based biotechnology company, ATB-346, targets the need for a safer drug for chronic pain and inflammation, says Mr. Palmer. It is in a phase-two clinical trial comparing it to naproxen (Aleve), a pain reliever that can have side effects such as ulcers and higher blood pressure, he said. The market for the popular painkillers naproxen and celecoxib (Celebrex) is worth about US$12-billion. If Antibe can show better results for its drug, it could gain market share and become a potential takeover target for suitors that include its rivals, he said. Antibe also has another business in Citagenix Inc., a supplier of bone grafting and tissue regeneration products that generates about $10-million in sales annually, he added.
Tim McElvaine, president of McElvaine Investment Management Ltd., Victoria
- The pick: Maxim Power Corp. (MXG-TSX)
- 52-week range: $2.46 to $3 a share
This Calgary-based independent power producer, which is controlled by two shareholders with a total 42-per-cent stake, has been undergoing a "simplification program" that could lead to a sale, says Mr. McElvaine. After divesting its U.S. and French generating assets, Maxim has "roughly $2 per share of cash net of debt," he said. Maxim also estimates it is owed more than $42-million, or about 75 cents a share, for overpayments made to the Alberta Electric System Operator, he said. "It is just trying to finalize [the amount] at this time." The cash plus reimbursement is more than the current share price, so there is a margin of safety, he said, while Maxim also owns various development assets and a bunch of tax losses, he added. "It would make sense if there was an orderly sale."
- The pick: Voya Financial Inc. (VOYA-NYSE)
- 52-week range: US$33.53 to US$54.87 a share
The New York-based retirement, investment and insurance company has been retooling its business mix and has become a more attractive takeover candidate, says Mr. McElvaine. Voya struck a deal in December to divest its troubled variable-annuity business to investors, including Apollo Global Management LLC. "Senior management is highly incentivized on increasing the return on equity," and ultimately "I think they would be open to an offer," he said. American International Group Inc. was reportedly negotiating to buy Voya last fall but they couldn't agree on a price, he said. Voya, which has more than US$220-billion in assets under management, was formerly known as ING U.S. It was spun off from Dutch bank ING Groep N.V. after the 2008 financial crisis.