Qualiport

[ October 30, 2000 ]

Takeover Investing

By Maynard Paton (TMFMayn)

Rochester, Kent -- Never invest in a company's shares on the expectation of a takeover! That's the advice most investors have been given at some stage. And good advice it usually is, too. There are always plenty of City acquisition whispers that ultimately lead to investment pain. However, the possibility of a fat takeover premium and a quick buck never fails to dampen the spirits of some.

Here's the typical "investment research" applied to a possible takeover situation. For small investors, the trail often starts with a lead from the newspapers.

Let's take a topical example that involves Qualiport favourite Pizza Express (LSE: PIZ). The Financial Times reported on Saturday that Pizza Express had made an informal approach to buy City Centre Restaurants (LSE: CTC). The "takeover investor" does some digging.

On Pizza Express, he finds David Page, the company's Chairman, having this to say in his latest annual statement: "The mid-price dining market is due for consolidation and only the strongest and most competent operators will survive".

On City Centre, he finds a company continuing to suffer from difficult trading. The Chief Executive has just resigned and his replacement has been asked "to identify the appropriate actions to maximise shareholder value".

Consolidation? Maximise shareholder value? All in all, the FT story looks convincing. And a quick look at City Centre's valuation reveals a nice 6%-plus dividend yield too! With the shares looking cheap and the mantra "no smoke without fire" ringing loudly, the "takeover investor" buys into City Centre...

Speculation

But don't worry. The Qualiport isn't about to base its investment decisions on newspaper stories or get involved in City Centre.

Simply, most rumours just don't stack up. I mean, what does City Centre have to offer Pizza Express?

• Great management? City Centre's financial record suggests not;
• Great dining brands? Again, City Centre's financial record suggests not;
• Great restaurant locations suitable for Pizza Express outlets? Hmmm... perhaps.

But this theoretical Pizza Express "acquisition for sites" strategy still leaves question marks for those expecting a bid for City Centre, namely:

• In his latest annual statement, David Page commented: "We believe the year to 30 June 2001 will be less competitive in terms of site acquisition prices". The impression given is that PizzaExpress aren't struggling for individual sites, and;
• PizzaExpress aren't going to want every City Centre site. A part disposal of the restaurant estate, rather than a full offer for the company, is a definite possibility (assuming the rumours are true, that is!).

In short, there's nothing unique about City Centre that should inspire a bidder. And apart from "value", it's the unique characteristics of a business that mostly inspire corporate predators.

And so we move on to Southnews (LSE: SNW), the newspaper publisher that does have a few unique characteristics...

Southnews

I'm not sure whether to laugh or cry. What am I talking about? I'll tell you -- the news from Friday that Southnews had accepted a bid from fellow newspaper publisher Trinity Mirror (LSE: TNI)!

After pondering over Southnews as potential Qualiport material back in January, I decided they were "one to consider further". Worries about the newspaper industry's low organic growth prospects, all the industry constituents' growth-by-acquisition strategies and the threat of the Internet signalled investment caution. Well, at least to me they did.

Anyway, it only dawned on me last week that perhaps newspaper publishers weren't so bad after all. Due to the change in the financial climate over the past few months, the online threat has since been subdued. Also, the similarities between newspaper publishers and Qualiport member Emap (LSE: EMA) -- a company exhibiting low growth but maintaining a high return on reinvested equity -- was another investment attraction.

My investment turnaround could not have been better timed. The day after, Trinity Mirror announced the bid and Southnews shares surged 50%-plus on the day.

Hindsight is a wonderful thing

With hindsight, I somewhat missed the big picture with Southnews. The local newspaper industry is consolidating. For a variety of reasons, local newspaper publishers find it very difficult to establish a new title and then successfully compete against an existing rival. And in an effort for growth, "if you can't beat 'em, buy 'em" is the motto of the industry.

Over the last 18 months, there's been plenty of industry activity.

• Johnston Press (LSE: JPR) has bought Portsmouth & Sunderland Newspapers;
• Gannett (NYSE: GNI) has bought Newsquest and Newscom;
• Trinity and Mirror Newspapers merged to form Trinity Mirror;
• Daily Mail & General Trust (LSE: DMGT) has bought Bristol United Press, and;
• Southnews has bought Adscene Newspapers.

So it shouldn't come as any surprise to see Southnews, by far the smallest UK quoted newspaper publisher, receiving a bid. But investing in Southnews (pre-bid) and City Centre, with thoughts of a potential takeover, are two entirely different matters.

If the bid for Southnews never materialised, then the investor would still be part owner of a very respectable business. Remember, Southnews' attraction to Trinity was their dominance of local newspapers in certain parts of the South East. That "franchise" would keep Southnews shareholders happy for a long time, even without the Trinity approach.

On the other hand, what have City Centre shareholders got to look forward to should the rumoured bid not appear? Not a lot.

Isn't it ironic...?

Does the bid for Southnews alter the Qualiport strategy? Not really. Ideally, the Qualiport is looking for businesses possessing long-term sustainable advantages. We're looking for businesses with unique characteristics that'll serve long-term shareholders well.

In fact, there is an irony with our investment tastes and takeovers. The companies that we seek are in themselves more likely to be on the receiving end of a bid than also-rans like City Centre. As we've seen with Southnews, the only way a competitor will ever get to replicate a business "franchise" is to buy it. And thus, a takeover should always be seen as a by-product of investing, not the end goal.

Where Next?

• A well-timed Paper Talk Turnaround
• Southnews discussion board