Mergers and acquisitions are back with a vengeance this year. After Shell’s bumper deal for BG Group, analysts believe that more mega-deals are on the horizon.
Top of the list
Luxury goods retailer Burberry (LSE: BRBY) is one of Goldman Sachs‘ top M&A candidates for the next 12 months. It’s believed that the private equity sector would be interested in the company.
The cash-rich balance sheets of private-equity companies, combined with low financing costs, could push deal makers to pursue an offer for the company this year.
Moreover, the company’s sales are surging within developed markets as the global economic recovery gets under way. Burberry’s second-half underlying sales rose 9%, with strong trading in the United States and Europe helping to make up for weakness in major markets such as Hong Kong. Store sales grew by 13% over the period.
Still, Burberry is no stranger to takeover speculation and I wouldn’t be surprised if this is just another rumour. What’s more, the company currently trades at a premium valuation of 23.7 time forward earnings. At present, Burberry yields 1.9%.
European consolidation
Media giant Sky (LSE: SKY) has also been the subject of takeover chatter recently. Indeed, last week there was talk that French media giant Vivendi was weighing up a bid for its smaller peer. However, the speculation was dismissed as nonsense by Vivendi’s board soon after.
Nevertheless, Sky remains an attractive takeover target. Indeed, the European telecommunications and multimedia market is currently undergoing a wave of consolidation, and Sky could be gobbled up by a larger peer such as Liberty Global and Vodafone. However, any potential takeover could be complicated by Mr Murdoch’s controlling stake in Sky, now held via 21st Century Fox.
But for investors, Sky remains an attractive prospect as a standalone business. Sky’s recent deal to acquire Sky Deutschland and Sky Italia built a leading European pay-tv provider and group earning per share are set to jump by 19% during 2016. This means that the company is trading at a forward P/E of 16.3. Sky currently supports a dividend yield of 3.1%.
Oil consolidation
Lastly, BP (LSE: BP) has once again been the subject of bid speculation this week. The speculation came after ExxonMobil’s management announced that they were looking to do a big deal, and didn’t want to be the last to the M&A party.
However, it’s unlikely that a deal between BP and Exxon will come about any time soon.
For starters, monopoly regulators would force the enlarged company to divest billions in assets, negating the whole point to a deal.
Second, Exxon has just turned its back on joint exploration projects in Russia thanks to US sanctions. It’s unlikely to want to go back to the region any time soon. And thirdly, BP is still dealing with the fallout from the Gulf of Mexico disaster — even Exxon is unlikely to want to buy into a lawsuit of that size.
But as a standalone entity, BP remains a great investment. The company’s shares currently yield 5.6% and BP is one of the few oil majors that will be producing a positive free cash flow within two years.
While other oil majors struggle with high capex costs and low oil prices, BP has acted swiftly to slash costs and safeguard profits, which should benefit shareholders over the long term.
