February is traditionally the month when lovers work up the courage to make overtures to their heart's desire. While February might not see it happen, some companies could be thinking of pairing up in the not too distant future.
Seizing the Opportunity
The retail property sector, on the back of retail recovery, has outstripped other property sectors by a healthy margin over the last two years. Granted, those properties need to be located strategically, as is the case with Retail Opportunity Investments Corp. (ROIC).
Since its initial public offering in 2009, Retail Opportunity was able to enter the market and select choice properties at a time when values were low. It has the added benefit that it was unburdened by any loss making assets or high vacancies. Opting for community and neighborhood retail centers with strong grocery anchor tenants on the West Coast, Retail Opportunity operates with an extraordinary vacancy rate of less than 5%.
Kimco Realty Corporation (KIM) has interests in 940 shopping centers across 44 states, Canada, Puerto Rico, and South America. Its portfolio comprises neighborhood and community shopping centers whose numbers it continually seeks to swell with choice properties like those Retail Opportunity has assembled.
Kimco is a cash buyer and it currently holds $180.2 million in cash and equivalents, which will go some way toward Retail Opportunity's $497.39 million market capitalization and $489.13 million enterprise value. Retail Opportunity's investors are yet to see their investment return full value - its dividend yield is 4% in a sector where double digit dividend yields are commonplace - and the deal might need to be sweetened for them. We could see an offer of around $550 million or $12.85 per share.
A provider of commercial real estate and capital markets services to the U.S. commercial real estate industry, HFF, Inc. (HF) is a mid cap player in an ultra-competitive market, with a market capitalization of $502.7 million and current share price around $14.
Jones Lang Lasalle, Inc. (JLL) plays second fiddle to CBRE Group, Inc. (CBG) with $3.30 billion revenues TTM to CBRE's $5.79 billion. While CBRE Group has favored major international expansion - the merger with Trammel Crow which formed the group in 2006 being an example - Jones Lang Lasalle has merged with two smaller agencies in the last 12 months, King Sturge in the U.K. and Pacific Real Estate Partners in the Pacific Northwest.
A merger with HFF would expand Jones Lang Lasalle's U.S. operations, adding 17 offices and 400 employees to its operations and create substantial upside through synergy for both firms. An offer above HFF's enterprise value of $485.95 million, between $525 million and $550 million or $14.60 to $15.30 per share could be welcomed.
Already dancing together
The semiconductor industry is another highly competitive sector where any technological or strategic advantage needs to be exploited to survive and thrive. Entropic Communications (ENTR) are behind the "connected home" technology on which Multi-Room DVRs from companies like DIRECTV Group, Inc. (DTV) and Time Warner, Inc. (TWX) run. In this sector it is up against two big players: Qualcomm, Inc. (QCOM) and Broadcom Corp (BRCM).
When Broadcom acquired NetLogic Microsytems, Inc. (NETL) last year, it made Entropic's independent existence more and more unlikely. Three weeks ago it announced that it was collaborating with Qualcomm to "offer MoCA-to-Wi-Fi solutions to home networking." Methinks it is only a matter of time before the collaboration becomes a more permanent arrangement.
Entropic shares have traded lower since September on the back of slowing revenue growth and it is currently trading around $6 and a trailing price earnings ratio of 7. Despite predicted earnings trailing off, an offer would have to come at a significant premium to be acceptable to shareholders. A likely offer could be between $9 and $9.25.
On-again, off-again romance
Getting off the ground in the pharmaceutical industry is hard work - and then it might not be enough, as AVEO Pharmaceuticals, Inc. (AVEO) is experiencing. The company is a specialist cancer drug maker whose most prominent product, Tivozanib, is undergoing late clinical trials as stand-alone renal cell carcinoma treatment. It is a market worth approximately $600 million per year, but competition is severe with a seventh drug recently approved by the FDA for the treatment of advanced kidney cancer.
Merck & Co., Inc. (MRK) held development and commercialization rights to AV-299, another cancer drug that Aveo is developing, but decided to return the rights in 2010. If Aveo emerges with FDA approval for Tivozanib, Merck might try to reignite their relationship. And Aveo, which holds $45 million in cash, would welcome the move rather than having to approach shareholders for more funding.
Depending on the outcome of the clinical trials, Tivozanib could emerge as an also-ran or as a possible market leader. I tend to favor the upside as initial reports were positive. An offer could range between $800 million and $900 million, translating to $18.56 and $20.88 per share. Aveo currently trades around $13 and has a market capitalization of $567.63 million.
Wild card entry
A family-controlled life insurance company from Texas, National Western Life Insurance Company (NWLI), is being run like the family treasure it is with strong share growth over the years to show for it. Not only does the Moody family control National Western, it also owns a large percentage of its stock. Being an illiquid stock, it trades well below book value. In fact, its price to book value is 0.41.
Private equity might find National Western's stability alluring, but would then really need to make it worthwhile for the Moody family to sell their shares. Currently trading at around $140 per share, perhaps they can be enticed to part company with their holdings nearer book value. Upward of $200 - $220 per share could be sufficient premium to enable a transaction.