Find The Next Cooper Tire Or Berry Petroleum Takeover Targets

by: Marc Courtenay

"Nothing is more uncertain than the favor of the crowd"--Marcus Tullius Cicero (Great Roman Orator, Politician 106-43 B.C.)

June 11, 2013 was a good day to own shares of Cooper Tire & Rubber (NYSE:CTB). It closed at $24.56 on slightly higher than average volume.

If you watched it open on June 12th at $34.50, more than 40% higher than the previous day's closing price, you might have thought you were dreaming. The headlines quickly told you that you weren't.

Apollo Tyres of India made Cooper an offer it couldn't refuse at $35-per-share or $2.5 billion. Law firms are already looking into possible breaches of fiduciary duty in connection with the proposed sale, but the market seems to still believe the sale will go through.

As I write this article the Federal Reserve's Open Market Committee (FOMC) announced it will maintain the pace of its program to keep long-term interest rates at record lows, but offered a slightly more optimistic outlook for the U.S. economy and job market.

This should help accommodate more financed buy-outs and takeovers in the corporate world. This is why I anticipate another takeover in the tire industry, and the acquired company may have similar features to CTB.

Which Similar Company May Be Acquired Next?

That's why I'll be watching Goodyear Tire & Rubber (NYSE:GT) which still looks undervalued selling at just a little more than 6 times forward (1-year) earnings. GT's PEG ratio (5-year expected) is a ridiculously low 0.18 which seems to totally discount the company's future growth.

The following 1-year comparative price chart between GT and CTB shows how the stock price movement of each company was very similar until CTB was acquired.

Chart forGoodyear Tire & Rubber Co. (<a href=

As of its most recent quarter ending March 31, 2013 GT had total-cash-per share of $9.71 and almost $1 billion of levered free cash flow. On the negative side of its balance sheet it is carrying around $6.6 billion of debt, which is in my opinion too much for a company with a market cap of only $3.8 billion.

An acquirer could conceivably finance a takeover with both cash and equity while taking advantage of the low interest rate environment to restructure the debt. An offer of just under $22-a-share would mirror the 40% premium to GT's current share price of around $15.40.

Goodyear Tire has the cash to pay a dividend to shareholders, but currently the company seems adverse to doing so as it builds up its total cash with its $855 million operating cash flow. Another pending possibility is an announcement of a stock buyback program when GT announces its quarterly earnings on July 29, 2013.

More Takeovers Coming in the Energy Patch

I've written previously about the pending acquisition of Berry Petroleum (NASDAQ:BRY) by Linn Energy LLC (LINE). LINE has rebounded 7.4% on Wednesday after Leon Cooperman of Omega Advisors said in a CNBC interview that the $8.4 billion hedge fund has done its due diligence and it still believes in the LINE story.

Cooperman, the former director of Goldman Sach's (NYSE:GS) Asset Management division, indicated he had talked to management at Berry about its proposed merger with LINE. Mr. Cooperman put a positive spin on that topic which helped explain BRY's rallying Wednesday to over $44-per-share before the FOMC meeting and Fed Chairman Bernanke's press conference afterward.

Back to Omega Advisors and Mr. Cooperman, he told CNBC that he isn't concerned with how LINE accounts for its hedging program to reduce its exposure to volatile energy prices. He also said that he estimates Linn Energy's net asset value at about $40 a share, well above LINE's closing price on Tuesday June 18 of $31.59.

Omega Advisors is Linn Energy's largest outside investor, with a 3.05% holding in the company's outstanding shares. Mr. Cooperman indicated that Omega also has positions in Atlas Energy (NYSE:ATLS) and Atlas Pipeline Partners (NYSE:APL).

Time to Check Out Chesapeake Energy?

So which companies may be the next takeover targets in the energy patch? One possibility is the recently reformed Chesapeake Energy (NYSE:CHK) with its new CEO Robert Lawler, the former Senior V.P. of international and deep-water operations at Anadarko Petroleum (NYSE:APC).

CHK has a market cap of roughly $13.5 billion. The company has slashed its capital-spending budget to $6 billion and has raised around $14 billion through asset sales.

CHK has increased its oil production, and with the price of natural gas holding its own, CHK has been able to increase its cash flow while narrowing its cash deficit. Though CHK has around $13.6 billion in debt, it has a beneficial major stock owner named Carl Icahn who as of March 31, 2013 controls nearly 9% of the company's stock.

Mr. Icahn has plans for CHK and one of his biggest objectives is to reduce debt. One way to do that is to sell more assets. Another way is to get CHK ready for a bigger energy predator to buy it at a premium.

Here's a Smaller Size Energy "Prize" to Consider

Another takeover target which is much smaller than CHK is Kodiak Oil & Gas (NYSE:KOG). It's a "bite-size" company with its relatively small $2.4 billion market cap. KOG has established itself as a significant player in the Bakken Shale, one of the best areas to produce oil in the U.S.

KOG recently increased its presence there by purchasing the rights to 42,000 acres which increase its presence in the Bakken by 27%. It also gives Kodiak an additional 5,700 barrels of oil equivalent per day in production.

Potential investors are encouraged to learn all the juicy details about KOG by visiting its user-friendly website. It contains the details of its recent purchases and plans to expand production. It also includes the good news of its first quarter financial results.

For the first quarter-ended March 31, 2013, the company reported oil and gas sales of $165.1 million, as compared to $79.9 million during the same period in 2012 and $130.8 million in the fourth quarter 2012, representing increases of 107%, and 26% respectively. Kodiak reported an overall 103% increase in quarter-over-quarter equivalent sales volumes with 1.95 million barrels of oil equivalent (MMBOE) sold.

This equates to an average of 21,700 BOE per day (BOE/d) during the first quarter 2013, as compared to 963 thousand BOE, or an average of 10,578 BOE/d in the same period in 2012. Crude oil revenue accounted for approximately 94% of oil and gas sales recorded during the first quarter 2013.

Adjusted EBITDA earnings, a non-GAAP measure, was $124.4 million for the first quarter 2013, as compared to $53.7 million in the same period in 2012, reflecting a 131% increase. These kinds of results should improve even more as KOG leverages its increased production opportunities in the Bakken.

Motivations for Acquisitions and Hints for Takeover Hunters

Larger energy companies that want to grow via accretive acquisitions will find it hard to ignore the fact that in the first quarter 2013, Kodiak reported net income of $19.4 million, or $0.07 per diluted share, compared to net income of $1.7 million, or $0.01 per diluted share, for the same period in 2012.

Finding the next Cooper Tire or Berry Petroleum is doable if a speculator diversifies and spreads his or her bets around. Also remember to look for more than one inconspicuous possibility.

For example, wouldn't it be ironic if after all the speculation and uncertainty surrounding Linn Energy that the company may be setting the stage to be a takeover target itself. Even if you factor in the value of the BRY acquisition the market cap of LINE would be less than $10 billion. That could be easily financed in a part cash, part stock deal.

Stranger things have happened. The bottom line is a company becomes a takeover target because it offers the acquirer more than it could duplicate through internal, organic efforts. The takeover targets I've mentioned here have a lot to offer and stand out in attractive ways that would help acquirers to expand as fast as possible.

Disclosure: I am long KOG, GT, LINE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.