UK mergers and acquisitions activity is stubbornly subdued, but broker Liberum says this is not expected to persist and has polled its sector analysts to qualitatively identify the most likely targets.
Global M&A hit a post crisis record at $945bn in the second quarter of the year, showing that confidence is rising in an environment of low interest rates and scarce organic growth.
However, M&A in UK indices has remained stubbornly subdued, Liberum points out, with just 1% of FTSE 250 market cap was taken out in 2013 versus a mid-cycle average of 4%.
However, its own poll found that 85% of fund managers forecast a material pickup in small cap and mid cap (SMID) companies being taken over in the next 12 months and 95% of finance chiefs agree, according to a Deloitte survey.
In the Aerospace & Capital Goods sector, Spectris is the pick as being "tempting for hungry US leviathans", with a 17% discount to peers and leading positions in niche instrumentation and control markets.
In Agriculture & Chemicals, New Britain Palm Oil has been subject of press speculation that 49%-owner Kulim has instigated a process to sell its shareholding, with Felda Group confirming its interest and a number of other SE Asian plantation groups said to be interested.
Also in that sector, Syngenta is recommended as M&A pressure after the leaks of Monsanto weighing up a deal creates a catalyst for re-rating, while Johnson Matthey is a world leader in its fields with strong patents, tax attractions, a strong balance sheet and solid cashflow power.
Among housebuilders, Bovis is the cheapest and "could be especially attractive as it has a significant strategic landbank, which has very little carrying value on the balance sheet and yet has significant economic value as the options allow land to be acquired at a discount to open market value".
In Financials, Jupiter Fund Management is a 'buy' for its stand-out track record, positioning and opportunity as consolidation in the sector continues apace.
In Media, ITV is a top pick and could attract a buyer for its market-leading 45% of position of UK television advertising, growing ownership of content and the upside potential from retransmission revenues. For buyers more focused on buying a position in events, UBM has an excellent global position from its Asian presence in a market that is heavily fragmented and thus ripe for consolidation, while Tarsus is "structurally attractive", has low risk of disintermediation and is focused on faster growing markets and the United States.
In Pharmaceuticals, AstraZeneca is worth £58 ex-bid premium, according to the broker's methodology, and the timeline on any potential resurrection of a Pfizer deal is likely still some months away. "A key driver of AZN' share price in the near-term is the publication of clinical data on the immunotherapy combinations at ESMO which begins on September 26th. We believe it is too premature to write off AZN in immunotherapy without seeing the combination data. The shares
could move sharply higher if the data is strong."
In Retail, ownership structure, debt or valuation make most of the retailers under coverage unlikely takeover targets but two "unlikely targets" are chosen in Asos and Mothercare, over which the broker's analysts have 'sell' recommendations. "With the shares having fallen by 55% from their February high, we think that if ever anyone were going to bid for ASOS, it could be now."
Looking at Support Services stocks, Liberum noted that industry leaders such as Balfour Beatty and Serco have "suffered from a loss of focus" and newcomers are looking to fill the void. "We expect Atkins, Interserve, Hyder and PayPoint to be the large acquirers of the next year." A diverse range of potential targets includes Balfour, as well as Costain, Daisy and Hyder Consulting.