McCormick & Company $MKC recently walked away from making an offer for Premier Foods sending PFD:LSE shares down >26%. Whilst PFD is not a stock I hold today’s news prompted this article.
Some of you may know me initially from Twitter as @conkers3 or now as Peter @lsesharetalk via podcasts http://www.lsesharetalk.com/share-news/lse-share-talk-interview-jeremy-martin-chief-executive-of-horizonte-minerals-hzm/ and http://www.lsesharetalk.com/share-news/roy-pitchford-group-chief-executive-vast-talks-to-lse-share-talk/. If so, you will also know that I have a preference for buying undervalued contrarian stocks that have the potential catalyst of a turnaround. Of course this only forms part of the multi-faceted strategies within my whole portfolio. However a recurring theme within my portfolio is that of takeovers, as you can read in two of my earlier blog entries:
WHEN A TAKEOVER PREMIUM IS NOT ENOUGH! PART ONE http://sumo.ly/hSjK .
WHEN A TAKEOVER PREMIUM IS NOT ENOUGH PART TWO http://sumo.ly/hSjm .
When I concluded Part Two in September 2015, INNOVATION GROUP was priced at 38.75p and under the iron grip of the US behemoth CARLYLE Group after recommending a measly cash offer of 40p. I waited for a White Knight and higher offer for INNOVATION which had a sum-of-the-part (SOTP) value of approx 52p. However none were forthcoming, so on the 17th of September I reluctantly sold all my INNOVATION shares that I had purchased two months earlier for 32p for 39.75p. I did this rather than tying up my profits for several months waiting for the deal to complete.
Furthermore, as INNOVATION was involved in INSURANCE TECHNOLOGY (INSURTECH) I knew the sector relatively well and was determined to find a replacement in this sector niche. During thorough research I discovered that the highly regarded Craig Wilson (Vice President at Hewlett Packard Enterprise Services) would be taking over as CEO of the beleaguered XCHANGING Group http://www.xchanging.com/ XCH:LSE . With such an Industry restructuring heavyweight taking the helm, this gave me additional confidence that XCH’s turnaround in fortune could eventually take place.
I therefore took the plunge on the 23rd September 2015 re-investing my INNOVATION funds into XCH at 99.75p. As a contrarian I am often asked what did I see or why did I buy at that particular moment. My answer is a simple one: I buy when I see deep value to SOTP and potential catalysts for realisation of long-term value. The Irish Poet W.B. Yeats famously wrote “Do not wait to strike till the iron is hot, but make it hot by striking”.
Less than a week later on 29th of September XCH’s INSURTECH subsidiary XUBER announced 20 new contract wins with new and existing customers. http://www.xuber.com/xuber-secures-20-new-contract-wins . This led to XCH’s share price closing at £1.055p on the day of the contract wins. The share price went onto close the week at £1.11p. Remarkably over the course of that weekend rumours swirled that XCH, had been approached by several parties about a deal. With prospective suitors including the Private Equity giant Apollo Management. Sources were suggesting that bidders were likely to offer in the region of £1.60p-a-share for XCH.
Suffice to say I could hardly wait to see what news would be released on the 5th of October 2015. That morning it was confirmed that CAPITA (CPI:LSE) and APOLLO Management were both in talks to buy XCH for about £400M. XCH’s share price duly opened at £1.70p and closed the day at £1.66p.
On the 14th of October XCH backed Capita’s £1.60p bid http://www.xchanging.com/regulatory_news_article/41884, whilst stipulating that it remained in talks with APOLLO wrt a higher offer http://www.xchanging.com/regulatory_news_article/41885 .
I waited a week for APOLLO to return with another and higher bid offer but one was not forthcoming. Therefore on the 26th of October 2015 I trimmed my XCH holdings at £1.647p per share.
With XCH still in talks with APOLLO whilst recommending the CAPITA £1.60p offer, I continued to wait for that elusive higher offer. However at the time my patience was being tested by market noise and the volatile and fluctuating share price. I succumbed to said pressure and trimmed my XCH holdings again on the 3rd of November 2015 at £1.657p per share. I did this merely as a hedge in case APOLLO did not return with a £1.70p offer.
The following day the Financial Times newspaper broke that “CAPITA nears XCHANGING win as APOLLO withdraws”. This was confirmed by XCH http://www.xchanging.com/regulatory_news_article/42252 . This sent XCH’s share price crashing and it ended closing the day down 5% at £1.58p.
On the 5th of November 2015 XCH announced that it had won a three-year contract to supply insurance services to the Lloyd’s Service Companies operating from the Lloyd’s Asia platform in Singapore, with effect from 1 January 2016. http://www.xchanging.com/news/xchanging-wins-three-year-insurance-services-deal-supporting-lloyd-asia-platform .
On the 12th of November 2015 the XCH MNA roller-coaster took another amazing twist with another suitor entering the merger battle. With XCH announcing that it had received an approach from US listed Computer Sciences Corporation $CSC regarding an indicative proposal to acquire XCH for £1.70p per share in cash. http://www.xchanging.com/regulatory_news_article/42298 . XCH closed the day up >7% at £1.71p. George Soros is considered to be a contrarian and once remarked “The worse a situation becomes the less it takes to turn it around, the bigger the upside.” On this occasion it was beginning to look like he was going to be right.
On the 16th November 2015 as the market, XCH shareholders and I were regaining our composure after what had been an extremely volatile ride over the previous month. Then another suitor entered the fray. With XCH confirming that US listed $EBIX Inc had made an approach of £1.75p per share in cash. http://www.xchanging.com/regulatory_news_article/42314 . This was turning into a staggering MNA story with the unloved and beleaguered XCH turning from frog to being kissed by four princes in a little over two months. Beauty was indeed in the eye of the beholder. XCH closed the day up >7% at £1.805p
I had been very fortunate with the timing of my purchase, as the speed of the MNA bids and the global markets were not experiencing their usual December Santa rally. I opted to sell my remaining XCH shares for £1.755p per share on 8th December 2015.
No sooner had I sold out completely, $CSC returned 24 hours later with another bid valuing XCH at £1.90p per share in cash. http://www.xchanging.com/regulatory_news_article/42658 . XCH closed at £1.9425p on 9th of November 2015.
On 15 February 2016, $CSC announced that the US merger control condition set out in their offer document had been satisfied.
Bringing this up-to-date $CSC are more than likely to confirm the completion of its takeover of XCH for £1.90p during the course of the next few months.
Mergers and Acquisitions are notoriously volatile and there are never any guarantees that they will reach a successful conclusion. After all, not only do the companies’ different cultures have to fit, they also have to agree on price. This can lead to mergers ending in acrimony and failure, with the most recent ones being that of Orange and Bouygues’ $11 Billion French telecom deal collapsing. Most notably though (albeit for slightly different reasons) Pfizer and Allergan Plc called off their $160 Billion merger.
Doing thorough research will find you undervalued stocks, some of them will remain unloved for some time and they might get cheaper. However occasionally a stock will gain the attentions of predators by way of bid. The premium of the bid to the share price will vary greatly. Therefore it is vitally important to be flexible throughout the process to ensure that you make the best decisions for your portfolio. Because as with all things in investing there are absolutely no guarantees. As J.P. Morgan’s Chief Global Strategist, Dr David Kelly states, “The key to successful investing is not predicting the future, but looking at the present with clarity.”
In conclusion I would stress that no amount of research will guarantee success when trading or investing. However I would point out that without thorough research you will have a higher chance of being unsuccessful.
Lastly I would like to take this opportunity to thank you all for taking the time to visit our site http://www.lsesharetalk.com/ and I hope that you are enjoying the articles, podcast and insights we have produced thus far.
CONKERS QUOTE OF THE DAY
“The stock market is never obvious. It is designed to fool most of the people, most of the time”.
Jesse Livermore: the Great Bear of Wall Street, was an American stock trader & speculator
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