Fair Game

A takeover bid can provide shareholders with an unexpected windfall. These two companies could end up in a predator’s sights.

- Greg Hoffman

Before diving into the exciting topic of takeover targets, a quick disclaimer. I’d never buy a stock solely because it might receive a takeover offer and, for the most part, I reckon that’s a good rule for all long-term investors to follow.

Yet there’s no denying that takeovers can get the blood up. As Wesfarmers’ recent bid for rare earths miner Lynas showed, such deals can garner plenty of media headlines. For investors, the rise in share price can bring forward years of capital gains and deliver handy near-term profits.

Then there’s the prospect of a bidding war, where two or more companies set their sights on the same target. This can lead to mouthwatering returns for those holding shares in the target company. The bidding war that erupted over Warrnambool Cheese and Butter Factory (ASX: WCB) was a classic example.

In September 2013, Warrnambool received a takeover bid from Bega Cheese that valued each WCB share at $5.78. The bid was rejected by Warrnambool’s directors as inadequate. Less than a month later, Canadian dairy company Saputo showed up with a $7 offer, which Warrnambool’s directors unanimously recommended.

Saputo’s bid was a handy 21% higher than Bega’s initial bid but things were about to heat up even more. Ten days after Saputo’s bid, Murray Goulburn Co-operative entered the fray by announcing its intention to make a $7.50 per share bid for Warrnambool.

The action went back and forth until Saputo bid $9.05 per share, which proved the knockout blow. It was an astonishing 57% above Bega’s initial bid and even further above the price Warrnambool shares were trading at before Bega’s approach. Warrnambool shareholders laughed all the way to the bank.

Setting the scene