Consolidation in online gambling has looked likely for years, but has yet to get under way. That's mainly because it has taken an age for companies to reach agreements with the US Department of Justice (DoJ), which outlawed online gambling in 2006. So, although the industry remains fragmented, companies have been reluctant to do deals when it's not clear whether hefty settlements may be required by the DoJ. However, PartyGaming agreed to pay $105m (£68m) in April, since when it has been looking for acquisitions. The result of that is the recent confirmation of discussions with Austrian operator Bwin, which could create a £2bn European giant capable of fighting off the challenge of US operators such as Full Tilt. Both PartyGaming and Bwin have also independently eyed another player, Sportingbet, but talks haven't progressed because Sportingbet is yet to settle with the DoJ. However, broker Execution Noble reckons that a settlement would "elicit immediate M&A interest" – moreover, shares in the fast-growing, cash-rich company still trade on a cheap-looking 12 times expected earnings.
The group is developing a huge coal project at East Kutai in Indonesia. The 3.18bn tonne coal resource (based on just one of four licence blocks held) makes East Kutai one of the world's largest undeveloped coal resources and leaves Churchill strongly positioned to become a major coal supplier to regional power companies. East Kutai's coal is classified as medium calorific, which is highly sought-after because of its low ash and sulphur content. A feasibility study completed last December defined a 20m-tonne-a-year production rate and tendering to international construction groups is ongoing. Construction should begin this year with completion anticipated in 2012. Management has been evaluating how best to maximise returns to shareholders, and discussions have been ongoing with several interested parties including Indian and Chinese power companies. The shares more than doubled last year but remain well below analysts' valuations. And any deal can be expected to command a substantial premium.
BG Group is uniquely attractive within the oil and gas sector. That's down to its world-beating liquefied natural gas (LNG) business, enviable Brazilian offshore oil developments and production growth that's set to average 6-8 per cent a year to 2020. Indeed, its integrated rivals will struggle to reach 3 per cent growth. So the market expects a larger peer, in market value terms, to swoop on BG sooner or later. Shell, with its relatively poor growth prospects, is an obvious candidate. Resource giant BHP Billiton, which already boasts a sizeable oil and gas business, has also been touted. A BG takeover was hard to justify when hydrocarbon prices were swinging wildly and Brazil less explored. But oil now looks underpinned by a $60-$70 floor while, in the next couple of years, BG will realise both lucrative production in Brazil and a whole new southern hemisphere LNG business. A canny predator will know that holding fire now probably means paying more later on.
Plastic packaging specialist RPC has struggled of late with see-sawing raw materials prices and a long period of destocking, which hit inventories. The group also has a distribution network in Germany that it has desperately been trying to sell. These issues have resulted in RPC being highlighted as one of the most obvious takeover candidates in the group's general industrials sub-sector, with big industrial conglomerates such as BASF looking like the most credible bidders. What's more, back in 2008 the rumour mill suggested that packaging group Rexam could be interested - a 300p-a-share price tag was touted at the time, based on the group's past acquisition activity, although Rexam's debt pile could yet prove to be a constraint. However, RPC's shares – trading on about 12 times forecast earnings – aren't demandingly rated. In comparison, shares in other players in RPC's sector trade on as much as 28 times earnings.
Immunodiagnostic Systems (IDH: 700p)
Takeovers are a fairly common feature of the medical devices and testing market and one UK company operating in that space could well become a target – Immunodiagnostic Systems. The group is fortunate in that demand for vitamin D testing has taken off just as its own testing machine arrived on the market. The key for future success will be in the US, where the copious testing demanded by health insurance companies makes it by far the most lucrative market. Once the group has cleared the Food & Drug Administration's registration formalities, the potential for organic growth will be robust enough to interest the likes of the big test makers – such as Siemens or even direct rival Dyasorin. The group's shares are currently rated on about 12 times next year's expected earnings and, based on past experience of medical devices company takeovers, they could end up commanding a premium of about 20 per cent should a bidder emerge. Definitely one to tuck away and await events.
Capricorn Ventures, owner of the Nando's chicken-restaurant chain, has been a feature on the shareholder register of Clapham House for a number of years now. But there are reasons to believe that Capricorn, with its 25 per cent stake, may now be more inclined to bid for the group than it has been in the past. Its interest is widely believed to be in Clapham House's Gourmet Burger Kitchen (GBK) chain and, since the group's Tootsie restaurants were placed into administration, this is what Clapham House is principally focused on. However, the recession has forced GBK to offer an increased amount of discount meal deals to entice customers in, and some sector watchers fear this is doing permanent damage to the brand by associating it too closely in consumers' minds with low prices. But tough trading conditions have knocked Clapham House's share price, which means now may be an opportune time to swoop.
Next Fifteen Communications (NFC: 62p)
Global public relations and research group Next Fifteen Communications (NFC) has continued to grow revenues despite the tough economic climate. The group counts 25 of the world's top technology companies as clients, including Apple, Microsoft, IBM and Hewlett-Packard. So more than 80 per cent of sales are derived from the technology sector, which has been more resilient than expected. NFC also has a strong stable of non-technology clients, including Coca-Cola and Unilever, while roughly 71 per cent of revenues are generated outside the UK. With such an attractive offering, and plenty of cash, the group has already attracted two bid approaches from rivals – Chime Communications and Huntsworth. Both were rebuffed, but chief executive Tim Dyson has since revealed he's "not averse" to the group being bought. Analysts at Canaccord Adams have a discounted cash-flow-based valuation of 78p a share – well above the current share price.
Hazardous waste treatment and landfill business Augean has long looked like a takeover target. Indeed, shareholder One51 made a failed approach last year. The attraction is not Augean's rather patchy-looking trading record, but its assets within an industry that's naturally constrained by finite landfill resources. Augean has 8m cubic metres of void space for the landfilling of hazardous waste. It also has seven waste treatment and recycling centres, including two soil treatment centres. An application is also pending for Augean to take low-level nuclear waste from the UK's decommissioning programme. Such assets have caught the eye of infrastructure investors, funds and private equity players.
One stumbling block, however, could be One51 – with the shares at current levels, it's well out of the money on its 18 per cent holding. But with a relatively small number of large shareholders, a predator need only persuade a handful of investors to be able to pick up a majority stake.
UK Coal is Britain's largest coal miner and owns a 43,500-acre portfolio of land. The group hopes to double the estimated book value of its land bank by 2014 by achieving change-of-use planning consents on land formerly used for its mining operations. It's this land that has attracted its biggest shareholder, John Whittaker, who controls 28 per cent of the group through his private vehicle, Peel Holdings. A serial landbanker, Mr Whittaker presides over a property and transport conglomerate that controls £6bn of assets. Of course, not all of the land bank is suitable for conversion, and – as Mr Whittaker knows – it's a long and arduous process. However, one of Mr Whittaker's subsidiaries, Peel Energy, brokered a two-year wind farm development deal with UK Coal in November 2008.
As the IC went to press, UK Coal announced it had received a merger proposal from Hargreaves Services.
Resolution (RSL: 72p)
Life assurer Resolution is currently regarded as the primary consolidation vehicle within the sector. However, with the probability of higher capital reserve requirements when Solvency II regulations are introduced in 2012, consolidation pressures look set to build – and that could leave Resolution itself under bid scrutiny. After all, Standard Life made a serious approach back in the summer of 2007. Established by Clive Cowdery, who sold the original Resolution closed-life fund business to Pearl for just under £5bn, Resolution has already spent £1.8bn on buying Friends Provident, and has indicated that two further major acquisitions will be made before 2012. That means tasty synergies are on the cards through the streamlining and integrating of back-office operations – although serious bid interest may not materialise until those benefits start to flow though. And any potential bidder from outside the insurance sector would have its work cut out as Resolution's shares are 80 per cent held by other life assurers and banks.
