I wouldn’t bet a penny on the shares of Vodafone (LSE: VOD) (NASDAQ: VOD.US), Smith & Nephew (LSE: SN) and AstraZeneca (LSE: AZN) (NYSE: AZN.US) these days.
What’s Going On?
The shares of these three companies outperformed the market last week in the wake of persistent M&A talk: Vodafone stock was up 2.9%; Smith & Nephew stock was up 3%; and AstraZeneca stock was up 7.3%. The FTSE 100 index gained only 0.6% in the last five trading sessions. Based on fundamentals, the equity valuation of Vodafone has a downside of up to 50%, while both S&N stock and Astra stock may fall more than 25% to the end of the first quarter 2015, in my view.
Vodafone: The Worst Of The Three
Vodafone stock has been under pressure ever since AT&T offered to acquire Direct TV for almost $50bn. Once again, market rumours suggest that AT&T may now be ready to splash out top dollar to snap up the British behemoth.
I say: a takeover of the British group would be the only way to create value for shareholders. I am not convinced, however, that AT&T can afford a bid rumoured to be in region of £3 for each Vodafone share. Such a price tag would represent a 50% premium to Vodafone’s current equity valuation.
Assuming at least 50% of the deal is financed by debt, the net leverage of the combined entity would pose serious problems. Management would have to bank on cost synergies of up to 9% of Vodafone’s revenue to create any value, according to my calculations. I’d rather stop here: the disastrous Vodafone/Mannesmann tie-up springs to mind…..
Smith & Nephew: A Solid Business But The Stock Is Pricey
S&N is a solid business operating in a sector that will benefit from further consolidation. This is the bit I like. I just don’t believe that S&N shareholders will enjoy significant upside if a takeover offer emerges — and the risk that S&N won’t be taken over is real.
S&N shares price in a takeover premium in the region of 25%, in my view. The stock trades in line with the level it recorded in early June, when I noted that investors may have well decided to stick to their bet for some time. Now, however, value should be sought elsewhere. In fact, S&N won’t be the preferred option in more volatile trading conditions, and it can also be argued that its operations may find it difficult to grow organically in the near future.
Of course, S&N remains a strong business boasting hefty operating margins and a relatively strong balance sheet.
AstraZeneca: A Risky Bet
I have been impressed by the performance of Astra stock in the recent weeks, particularly because I don’t think Pfizer will make a comeback for Astra. Takeover rumours have returned with a vengeance in the last few days, but they should be dismissed, in my view.
Then, downside risk becomes apparent for Astra shareholders if Astra remains independent. Astra stock lost 7.5% of value between the end of July and early August. That drop came down to volatility, rather than anything else. Right, so: on what basis is Astra stock trading right now?
What appears evident is that investors are willing to buy “on weakness” in order to secure short-term gains that are hardly sustainable in the long run. Astra is more troubled than other rivals, and its bullish long-term projections are just that — projections.
