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UGL Limited jumps on takeover rumour: Here are more ugly ducklings as takeover targets

Everything has got a price and even the ugliest ducklings on our market are attracting their fair share of suitors.

This is essentially why engineering contractor UGL Limited (ASX:UGL) has jumped a further 5.7% to $1.58 in late morning trade following yesterday’s 6.8% rally.

Media reports that rivals are circling the embattled UGL are driving renewed interest in the stock and forcing some short sellers to close their positions.

According to the latest data from Australian Securities and Investment Commission (ASIC), which is always a week old, 10.3% of UGL’s shares are short sold. This makes UGL the eleventh most shorted stock on the ASX.

The surge in merger and acquisition interest makes this a dangerous time to be a short seller, who is a trader who borrows stock to sell in the hope of buying it back at a lower price later on to profit from the difference.

Every listed engineering contractor looks like a takeover target due to the sharp de-rating in the sector from the collapse of the mining bubble, but I think there are legs to the takeover speculation for UGL as it checks a number of boxes.

The more likely takeover candidates in this space will need to have some scale in operations, a relatively sound business to weather the downturn and be cheaper than the sector.

UGL does have its issues with the Ichthys power station project and investors will be wary as cost blowouts from two similar projects were the undoing of Forge Group.

But I think this risk is manageable and the stock is cheap as it sits on a price-earnings (P/E) multiple of around five times.

The Australian reports that Transfield Services Limited (ASX: TSE) could be mulling a bid as Transfield is trying to fend off a takeover from Spanish giant Ferrovial. Downer EDI Limited (ASX: DOW) is another potential bidder.

Let’s not forget that Bradken Limited (ASX: BKN) also received a marriage proposal at the start of the month with Pacific Equity Partners and Koch Industries offering to pay $2.50 a share.

The fact that Bradken’s share price never jumped close to the offer price shows that the market doesn’t think the deal will be consummated. Bradken is trading 1.1% higher at $2.24.

But I think if any takeover bid in the sector is successful, it will likely be the one for UGL and Bradken. What’s more, I think Maca Ltd (ASX: MLD) could also fall into the arms of a larger rival or even private equity.

These aren’t the only candidates. As I mentioned, the whole sector looks like it’s on sale.

Analysts from the Commonwealth Bank of Australia (ASX: CBA) are also tipping Macmahon Holdings Limited (ASX: MAH), Alliance Aviation Services Ltd (ASX: AQZ), ALS Ltd (ASX: ALQ) and Worleyparsons Limited (ASX: WOR) as likely targets.

Let’s hope the takeover interest marks a bottom for the struggling sector.

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Motley Fool contributor Brendon Lau owns shares in Bradken. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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