NRG Energy, Post Holdings and Other Stocks That May Be Takeover Targets in 2022

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With stocks in a bear market, mergers aren’t likely to pick up anytime soon.

But deal activity should revive once the markets rebound, and patient investors may want to consider a dozen potential candidates, according to report recently published by

Citi

group.

Citi analyzed more than 9,000 stocks from developed countries in the S&P Global BMI Index to produce a screen of likely takeover targets in 2022.

The screen focused on stocks on which Citi analysts have a “Buy” or “Neutral” rating, according to the report, “Searching for Alpha: M&A, Identifying Potential Takeover Targets.”

It identified common historical characteristics of potential takeover targets to help identify possible candidates.

Takeover targets tend to be smaller compared with their non-target peers in terms of market capitalization, revenue and employees. They typically pay little or no dividends but have higher total debt to assets.

Targets also usually have a high price momentum leading up to the announcement date, according to the report.

To make the list, the stock has to have at least a 70% likelihood to get sold and a minimum 75% free float, said Josie Gerken, a quantitative analyst at Citi Research and author of the report.

The screen featured several stocks from energy, since that sector is the best performing this year. This includes

NRG Energy

(ticker: NRG), a retail energy provider, which is the biggest stock with a “Buy” rating to make the screen. Energy firms Northern Oil & Gas (NOG),

APA

(APA) and

Magnolia Oil & Gas

(MGY) also made the list.

Consumer staples such as

Bellring Brands

(BRBR), which provides ready-to-drink shake and powder protein products, and

Post Holdings

(POST), the cereal company, also made the screen, as well as

MasTec

(MTZ), an infrastructure construction company. The screen included utility company

Southwest Gas Holdings

(SWX), and

The Chemours Company
,
a chemical provider.

Some on the list already have a takeover offers. Switch (SWCH), a technology infrastructure company, and

Meritor

(MTOR), an automobile parts maker, both made Citi’s list and they have both agreed to separate sales.

Eutelsat Communications

(ETL), the French commercial satellite provider, also made the screen. In September, Eutelsat rejected a $3.2 billion bid from telecoms investor Patrick Drahi.

The screen of takeover candidates comes as the number of mergers have slowed since posting a record-breaking year in 2021. This year, there have been just 13,699 announced global mergers, valued at about $2.1 trillion, according to data from Dealogic. This is down 22% from the 17,519 deals that totaled about $2.7 trillion for the same period in 2021.

Mergers tend to move in the same direction as the broad market. When it drops, merger volumes tumble, Gerken said. On Monday, the S&P 500 entered a bear market after dropping 3.9%, while the Dow Jones Industrial Average fell 2.8%, and the Nasdaq declined 4.7%. 

“But when you are coming out of a declining market, M&A goes up,” Gerken said. “Volume and the amount of deals goes up and down broadly in line with the market.”

Lisa Marchese, head of corporate development at

American Express

(AXP), who leads M&A, ventures and integration for the $130 billion financial giant, said valuations may have dropped this year, but it will take some time before this results in more mergers. Some sellers have opted to hold on to their companies as they adjust to the new prices, she said.

“There is still a rationalization of valuations that is happening,” said Marchese.

Marchese expects that it will take a few quarters before we see any sort of boost in mergers, which could come later this year or early 2023, she said.

“Given the cyclical nature of M&A activity, we’d expect the volume and total dollar value of M&A deals to pick up again coming out of this current market decline,” Citi’s Gerken said. 

Write to Luisa Beltran at [email protected]