Today’s news: AXA to buy XL Group (XL) for $57.60 cash per share; TiVo (TIVO) joins the Buy Low Opportunities Portfolio as a Strong Buy due to potential M&A activity.
The Boards of Directors of AXA and XL Group (XL) have unanimously agreed that AXA will purchase property & casualty insurer and reinsurer XL Group for $57.60 cash per share, a 33% premium to the March 2 closing price and a 59% premium to the XL share price when it joined the Buy Low Opportunities Portfolio on December 6, 2016. The transaction is scheduled for completion in the second half of 2018, subject to regulatory approvals.
The share price should not, theoretically, rise any higher than 57.6 this week. I recommend that investors sell near that price.
Sometimes a targeted company’s stock can rise higher than the buyout price, which most often occurs when the investor is set to receive shares of stock in the acquiring company, presuming that the acquiring company’s share price also rises (not a common occurrence). The AXA/XL merger is not that type of situation. An agreed-upon cash transaction has a definite value. Therefore, there’s no reason for the investor to hold the stock after the share price reaches 57.6 in the open market. (Sometimes I meet investors who hold the shares of a buyout target for months after the transaction is announced, when there’s no additional upside to the share price, and that’s why I want to emphasize that selling your XL shares this week is the desired course of action.) Sell.
Notable details:
- I do not currently recommend owning shares of AXA (AXAHY) because there are only two or three analysts covering the stock, and the company is expected to see EPS fall a bit in 2019. The shares of the acquiring company almost always languish for six to 24 months after the announcement of M&A activity.
- I mentioned several times recently that XL Group has been an active takeover target since early February when Allianz showed a public interest in acquiring the company.
- I mentioned several times in recent months that property & casualty insurers were likely to have a good year in 2018 because the companies are raising insurance rates after having not done so for a few years.
If you’re interested in owning other potential takeover targets, let me reiterate that both KLX Inc. (KLXI) and TiVo (TIVO) have hired investment firms to explore possible M&A activity. (Forbes reprinted my recent recommendation of KLXI, TIVO and XL in this article from March 2.) In that light, I’m adding TiVo, an entertainment technology company, to the Buy Low Opportunities Portfolio today as a special situation—a takeover target.
TIVO is not for the faint of heart. The stock has languished for many months, and could easily continue to languish. Profits are expected to fall 10.6% in 2018, then rise 24.2% in 2019. The dividend yield is a hefty 5.0%, and debt levels are fair. The company believes that the share price is inappropriately low, leading a TiVo representative to publicly discuss their interest in being acquired or going private.
To reiterate, I’m not adding TIVO to the portfolio based on my normal fundamental criteria. (The stock doesn’t meet those criteria, although there are certainly no red flags.) I’m adding TIVO as a takeover candidate. You might not see any price action for a while. The stock is a bargain, with a P/E of 9.0. You’re also getting paid a nice dividend while you wait for an M&A transaction to occur. Strong Buy.