strategic holders can be friend or foe - afr

Strategic holders can be friend or foe

PUBLISHED : 18 Nov 2010 | The Australian Financial Review | Brendon Lau.


QUOTE

The expected pick-up in corporate activity in 2011 is shining the spotlight on strategic investors and whether they might make moves on the small-cap stocks in which they hold stakes.

So-called strategic investors usually have different goals to other investors as they tend to be rivals to the target company and have an interest in exerting some form of control or taking over the entity.

An improving earnings outlook and rising share prices could prompt some strategic investors to make a move and mop up the rest of the company.

Those that don't may contemplate selling their stake to other interested parties.

But other investors shouldn't assume having a strategic investor is a good thing for the share price: it isn't always easy to work out who is a friend and who is a foe.

"Strategic stakes can often present investors with something of a conundrum," Eley Griffiths Group portfolio manager Brian Eley said. "Will the holder use the stake as a launching pad, or will they tire and the stake then becomes an overhang?"

ATOM Funds Management chief investment officer David Shearwood agrees that ascertaining whether a strategic investor is a good or bad thing needs to be done on a case-by-case basis.

"Strategic investors are generally self-interested. Being friend or foe depends on their own requirement because some are short term orientated and some long, and some are aligned with the board's thinking while others are

If a strategic investor does move to mop up the target, shareholders can expect a windfall. The average takeover premium paid is a little over 32 per cent.

One of the more likely emerging companies to get taken over is Extract Resources, according to Mr Shearwood. The miner could have the world's second-largest uranium mine when its project in Namibia comes on line.

"Rio Tinto is likely to buy Extract as then there would not be a need to build an extraction plant as the rock could be conveyed 10 km to Rio's existing Rossing mine," he said.

Rio Tinto holds about 15 per cent in Extract.

http://www.afr.com/p/markets/strategic_holders_can_be_friend_iok5siqS8y7B1gLdiIpmKM?hl