SAI Global Limited (ASX: SAI) today announced it has received a non-binding takeover proposal from Pacific Equity Partners (PEP) for $5.10 – $5.25 per share. Shares jumped over 17% on the resumption of trading from $4.28 on Friday, to $5.01 as I write. That's 1.8% – 4.8% under the proposed takeover price range. Takeover arbitrage investments are what Warren Buffett famously called work outs, and were, in part, responsible for his ridiculously impressive annualised return of 31.6% from 1957 -1968.
As with CSL Limited (ASX: CSL) and Veda Group Limited (ASX: VED), SAI Global was spun out of a quasi-governmental body, namely, Standards Australia. Although Standards Australia is not a government body, it does have a quasi-bureaucratic purpose. It is "charged by the Commonwealth Government to meet Australia's need for contemporary, internationally aligned Standards." SAI Global was the commercial arm of Standards Australia and since listing has grown into a global business, with 61% of revenue coming from Australia, 24% from North America and about 15% from the rest of the world.
As if the takeover offer weren't enough, SAI has added spice by replacing CEO Stephen Porges with chairman Andrew Dutton, who will serve as an executive director while the company searches for a new boss. This state of affairs would probably suit potential buyers, who could choose their own CEO, or retain Porges if they wish.
The company's services can be divided into information services, assurance services and compliance services. The assurance division facilitates product certification (for example, that food meets quality standards) and the compliance division assists companies to comply with legal requirements (for example, workplace incident management). Information services include providing settlement services for property transactions, so SAI Global profits from a booming housing market. For this reason, I have been looking at the company and am, of course, very frustrated that I didn't buy shares already. I guess I wasn't the only one running the ruler over SAI Global!
At a share price of $5, the company would yield about 3%, fully franked, with a strong potential for dividend growth in the future. At that price, I'd consider the company a reasonable long-term hold, but not a great investment. On the other hand, there is a decent chance that buyers at $5 would make a quick 2% – 5% in the next six months, if the takeover goes ahead. On top of that, there's a possibility that a higher bid could come into play. In that case, I would consider an annualised return of 20%+ to be a possibility.
If the bid falls through, you're still left with a high quality company to hold long term (for the dividend), though the share price would almost certainly return to around $4.30 in the short term. Although the arbitrage risk/reward on SAI is OK at $5, I'd need shares to drop to about $4.85 (all else being equal) before I bought in. If nothing else, Macquarie Group Ltd (ASX: MQG) will profit if the takeover does succeed. Having handled SAI's IPO many years ago, it is now advising on the takeover proposal. After an excellent 2013, Macquarie Bank is also worthy of a spot on your watchlist.
