Rocket fuel for small caps – three takeovers announced

If you aren’t already aware, I am optimistic about the prospect for small caps in 2024. Provided we have a combination of positive economic growth (even a short technical recession won’t upset my thesis) and a continuation of the disinflation that has informed the path of consumer prices over the last year, innovative small cap growth companies have the opportunity to catch up to mega-caps that dominated the investment landscape in 2023.

It's only Monday, and already we have a few small cap buyers taking the plunge with three takeover offers announced.

In last weekend’s The Weekend Australian, I published a column noting the recent dovish turn in the U.S. Federal Reserve's policy, which has significantly buoyed the spirits of market participants, particularly those in small-cap stocks. This shift, which hints at a potential rate cut of 0.75 percentage points next year, is a potential catalyst for a rally in what is often considered the most dynamic segment of the share market. Small cap stocks benefit greatly from the combination of favourable economic conditions and a more enthusiastic view of risk, especially in a scenario of lower interest rates.

My optimism is rooted in historical patterns where disinflation and positive economic growth have bolstered innovative growth businesses, and those with pricing power, suggesting a significant opportunity for investors.

Takeovers abounding

Adbri

Today Adbri (ASX:ABC), a prominent player in the construction sector, announced it formed an independent board committee tasked with evaluating a significant acquisition proposal. The offer, valued at approximately $2.1 billion, originates from a joint bid by the Barro Group, led by Adbri's shareholder and chairman Raymond Barro, and the New York Stock Exchange-listed company CRH.

The proposed acquisition price of $3.20 per share represents a substantial 41 per cent increase over Adbri's previous closing price of $2.27. In a related development, CRH expressed its interest in acquiring the shares of Adbri currently held by the Barro Group, which constitute 42.7 per cent of Adbri's issued capital. Additionally, CRH plans to announce a separate 4.6 per cent stake in Adbri through a cash-settled derivative arrangement.

Pacific Smiles

Dental services provider, Pacific Smiles (ASX:PSQ), addressed its shareholders regarding an acquisition offer from Genesis Capital. The offer, set at $1.40 per share in cash, comes in the wake of Genesis Capital acquiring a significant 18.75 per cent share in Pacific Smiles.

The proposal, estimated at $223.4 million, was formally presented to Pacific Smiles on December 16. In addition to the direct offer, Genesis Capital is exploring mechanisms that would allow existing Pacific Smiles shareholders to convert their holdings into shares in a private entity.

Pacific Smiles emphasised that the offer is conditional and hinges on several factors, including comprehensive due diligence, interactions with the company's top management, and negotiating essential transaction agreements.

The board of Pacific Smiles has expressed reservations about the timing of this proposal, suggesting that it may be strategically opportunistic, and in response has engaged Greenhill & Co for financial consultation and Gilbert + Tobin for legal advice. The last recorded share price for Pacific Smiles was $1.20.

Link

Mitsubishi UFJ Financial Group, a leading Japanese financial conglomerate, has announced plans to acquire Link Administration, a superannuation and platform services specialist, for approximately $1.1 billion.

Under the terms of the agreement, Link Administration (ASX:LNK) has entered into a definitive arrangement with Mitsubishi UFJ's subsidiary, MUFJ Trust and Banking Corporation. The proposed acquisition price is $2.10 per share, a significant increase from Link's most recent trading price of $1.70. The completion of the transaction is contingent upon receiving the green light from Link's shareholders and necessary court and regulatory approvals.

Link Administration has communicated to its investors that the deal would likely result in a cash payout of $2.26 per share, which includes a 16-cent dividend. The valuation of this transaction places Link Administration's equity value at around $1.2 billion, with an implied enterprise value of $2.1 billion.