2021 saw a flurry of mergers and acquisitions amongst ASX shares, making it a record year for listed M&A in Australia.
Some of the biggest moves among ASX shares that you likely followed would include the Santos Ltd (ASX: STO) merger with Oil Search, completed in December.
Or buy now, pay later (BNPL) star Afterpay's acquisition by global fintech giant Block Inc (ASX: SQ2), approved by shareholders in December.
And how can we forget Sydney Aviation Alliance's $23.6 billion private takeover bid for Sydney Airport? An acquisition that was completed following court approval in February.
But according to broker Wilsons, 2022 could see even more takeover action among ASX shares.
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Records are made to be broken
Wilsons notes that in 2021 10% of the S&P/ASX 200 Index (ASX: XJO) market cap was involved in M&A.
But despite a slow start to M&A in 2022, the broker believes it will still be a strong year for additional takeovers.
Among the reasons we could see another record year for M&A among ASX shares, Wilsons cites pent-up demand for transactions due to COVID delays, topped up by large pools of capital yet to be deployed.
The broker also points to the fact that earnings yields are much higher than corporate borrowing costs, "providing the financial ammunition for M&A transactions".
According to Wilsons:
Our work highlights that close to 20% of S&P/ASX 100 companies could potentially look financially attractive to an acquirer. Our list of vulnerable names to M&A all generate enough earnings and cash flow that they would effectively be 'self-funding' for an acquirer.
Which ASX shares are primed for takeover?
Wilsons applied 3 screening methods to winnow down the ASX shares that look primed for takeover.
Namely:
- Earnings yield (the inverse of the price to earnings (P/E) ratio)
- Free-Cash-Flow (FCF) yield
- Relative share price underperformance
The broker added its own quantitative screen to eliminate ASX shares like BHP Group Ltd (ASX: BHP), which it believes is too big to be an M&A target.
After running the numbers, Wilsons came up with 5 ASX shares that ticked all 3 screens.
First up, personal protective equipment and safety device provider, Ansell Limited (ASX: ANN).
On Ansell, Wilsons noted:
Significant share price underperformance on a large profit warning suggests structural factors may need to be addressed. Global exposure could fit in with large conglomerate consumables company or PE backed bid.
Also ticking all 3 screens is integrated services provider Downer EDI Limited (ASX: DOW).
Wilsons commented on Downer:
Valuation misconception, business now more focused following divestments. Structural trends of urbanisation and outsourcing of both private/public services.
The next ASX share primed for a 2022 takeover is global packaging company Amcor CDI (ASX: AMC).
According to Wilsons, Amcor is, "Well run and with an under geared balance sheet vs US peers, with strong FCF yield. Global scale likely to present a barrier."
Fourth on the list (in no particular order) is toll road operator and developer, Atlas Arteria Group (ASX: ALX).
For Atlas, Wilsons said, "Long dated toll road concessions could be vulnerable to private infrastructure asset managers."
And the fifth ASX share that looks primed for a 2022 takeover is Scentre Group (ASX: SCG), which owns and operates Westfield properties across Australia and New Zealand.
On Scentre Group, Wilsons commented, "COVID-19 impacted earnings – acquirer would have to believe in the future of shopping malls post-pandemic."
So which ASX shares will invite the first takeover interest?
Stay tuned!
