Mergers and acquisitions (M&A) occasionally make headlines in equity markets. There are different types of M&A activity, but simply put, it involves two companies combining into one entity.
Successful M&A transactions usually have specific, well-researched logic behind the strategic moves. Meanwhile, national regulators generally pass M&A laws, fostering takeover activity.
Today, we'll introduce a leading FTSE 250 business, namely G4S (LON:GFS)(OTC:GFSZY), which has recently found itself in the middle of a bitter bidding war between two other businesses that want to acquire it.
Recent research by Abongeh Tuny of the University of Sheffield highlights:
"The evidence suggests that takeover targets are inefficiently managed, relatively undervalued, comparatively smaller (than acquirers), suffer from a mismatch between growth opportunities and resources."
Let's take a closer look.
G4S
UK-based G4S is a multinational private security company that is well-known for its trained and screened security officers. Monitoring and response services is another core unit, where G4S (CSE:G4S) provides key safe-keeping, mobile security patrol as well as alarm receiving and monitoring facilities.
The group also provides security systems, like access control, CCTV, intruder alarms, fire detection, video analytics and security. With increased digitalization, the company is integrating technology into its offerings.
Over the past 12 months, GFS shares have returned more than 30%. Year-to-date (YTD), the stock is up over 5%. On Feb.18, it hit an all-time high and closed at 268.8p ($18.8 for U.S.-based shares). The current market-cap stands at over £4.1 billon (or $5.8 billion). Its forward P/E and P/S ratios are 17.27 and 0.56, respectively.
Recently, G4S made headlines as two separate privately-held rivals have started a heated bidding war to take over the company. The U.S.-based security and facility services group Allied Universal and Canada's GardaWorld both want to buy the company.
Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ) and private equity firm Warburg Pincus are the largest Allied Universal shareholders. Another leading private equity group, BC Partners, backs the Montreal-based GardaWorld. On a separate note, we recently discussed exchange-traded funds (ETFs) that focus on private equity.
Allied Universal agreed on a tentative £3.8-billion (or $5.3-billion) takeover bid with G4S in December 2020. But investors held out for a higher bid from GardaWorld, which had offered £3 billion ($4.2 billion) earlier in the summer, and recently increased this to £3.7 billion (or $5.1 billion). The board of G4S has recommended to investors that they reject GardaWorld's offer and instead support Allied's bid. But GardaWorld has indicated it will submit a higher offer.
GardaWorld’s management said:
“G4S is a business which has not delivered for shareholders, customers, employees or the public. G4S needs new, professional and experienced leadership to build a credible strategic plan which will transform G4S’s prospects and distance the business from its unhappy past.”
Finally, the UK's Panel on Takeovers and Mergers, in charge of regulating takeovers in the country, has decided to go ahead with a regulated auction for G4S. The auction will start on Monday, Feb. 22. If either party makes a new sealed bid by Wednesday, Feb. 24, the other will have until the next day to respond. If both sides bid during the first three days, both companies will be given a chance to make a new bid on Thursday, Feb. 25.
The current share price (or market-cap) of G4S stands at a premium over the highest bid. In other words, the market now expects at least one higher offer from either company.
The security space has been growing in recent years. An ever-growing fear of terrorism and crime combined with police budget cuts has allowed private security firms to bring in more revenue with ease. G4S took on £3 billion (or $4.2 billion) of ‘new and retained’ contracts for 2020, up from £2.5 billion (or $3.5 billion) in 2019. Cash flow for the company benefited from COVID-19 related payroll and other indirect tax deferrals.
Bottom Line
Shareholders in G4S are likely to witness significant developments in the weeks ahead. Investors need to be careful when buying into a stock that could be taken over. They may find their existing shareholding convert to a set ratio of shares in the parent company. Or, they could simply opt for a cash payment for the sale of their shares. Either way, a takeover bid at a higher price than currently seen is positive for existing shareholders. It's up to each investor to decide whether they want to cash out or take a new position in the parent or newly created merged company.
Those readers who are not G4S shareholders but are interested in investing in M&A opportunities could consider researching an ETF that focuses on M&A activity.
We plan to cover these funds in the near future.