Sunday, June 17, 2012

Super bid premiums are a vote of confidence in UK shares

With UBS equity strategists talking about a 20% chance of a "black cloud" scenario (mainly involving Eurozone calamity) leading the FTSE down to 3,500, it might seem an odd time to be touting UK shares.

But a bit of news from the oil sector last week gives British shareholders cause for optimism.  Cairn Energy agreed to buy a small North Sea oil company called Nautical Petroleum last week but had to pay a 50% premium to the pre-bid share price to get the deal.

That's been greeted favourably by analysts covering both Cairn and the company being acquired, so it sounds like a fair price and Cairn are not believed to have overstretched in valuation terms looking at the price per barrel of oil it is potentially getting for its £414m.

So does that mean that some UK companies are well under-priced?  If hard-headed oil companies are prepared to pay 50% more for assets than the current market value then there is certainly a case to be made in this sector even though there is some weakness in the oil price right now.

This video clip with an industry observer ends with an interesting exchange about Premier Oil, a much bigger North Sea specialist which has recently had a somewhat depressed share price:

Premier Oil has been an acquirer itself this year but the analyst reckons it is not too big to be on the receiving end of a bid and I would expect a large premium to its current share price if that were to happen. It has big output growth in the pipeline and was boosted by recent UK budget changes to encourage North Sea investment. As a bonus it has just announced a big find in the North Sea which should boost its value still further: Cove announces Carnaby oil discovery.

And the bid premiums have not just been restricted to oil company acquisitions.  When IT Group Logica was taken over in May, its share price soared 62%.

Buying companies in the anticipation that you will benefit from a bid is a dubious strategy and can lead to years of frustration, a good example being Smith & Nephew which has been a permanent "possible target" story for many years.  Even Sainsburys has been the subject of more bid rumours than it has sold hot dinners.

But the prices that companies are prepared to pay for other companies does offer encouragement that quality stocks are not intrinsically overvalued right now whatever the short term outlook.

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