2 ASX shares this fund manager considers possible targets in the M&A frenzy

Mergers and acquisitions are on fire at the moment. Which ASX shares could be in the crosshairs next?

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The merger and acquisition (M&A) frenzy has turned up the heat over the past few months, reaching record levels. According to Reuters, global M&A activity in the last quarter surpassed all previous records. While deals in the United States account for a large chunk of this, action in ASX shares has contributed to the surge.

In the past month alone we have seen M&A action involving Sydney Airport Holdings Pty Ltd (ASX: SYD), Milton Corporation Limited (ASX: MLT) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Hellofresh and Youfoodz Holdings Ltd (ASX: YFZ), Wesfarmers Ltd (ASX: WES) and Australian Pharmaceutical Industries Ltd (ASX: API), and many others.

With a large pipeline of M&A deals, it appears unlikely the frenzy will die down anytime soon. For that reason, we got Head of Australian Equities at TAMIM Asset Management Ron Shamgar’s take on a couple of ASX shares that could be ripe for a takeover bid.

ASX diagnostic imaging share

Originally the list (here) from Ron was three. Funnily enough, the first target has now received and accepted a takeover bid. That leaves us with the remaining two ASX shares with takeover appeal.

The first is listed diagnostic imaging provider Capitol Health Ltd (ASX: CAJ). This company owns and operates 63 clinics across Victoria, South Australia, Western Australia and Tasmania. Through these clinics, Capitol Health provides essential imaging including X-ray, ultrasound, CT, and MRI.

Mr Shamgar pointed out the current state of consolidation within the sector. For example, Sonic Healthcare Limited’s (ASX: SHL) recent acquisition of Canberra Imaging Group.

Additionally, fellow medical imaging provider Integral Diagnostics Ltd (ASX: IDX) currently trades on 21.6 times earnings before interest, tax, depreciation, and amortisation (EBITDA). Considering Capitol is valued at roughly 14 times EBITDA, Shamgar thinks the company makes a compelling case for acquisition.

Residential network provider

The other ASX-listed share with appealing M&A potential is Uniti Group Ltd (ASX: UWL). Uniti operates in the communications infrastructure space, providing fibre and wireless solutions.

TAMIM estimates that Uniti is winning somewhere between 25% to 30% of all new greenfield developments. Also, the company boasts a pipeline of more than 250,000 lots for fibre connection over the coming three to four years.

Another reason why Mr Shamgar finds this ASX share’s proposition appealing is the defensive nature of its earnings. Providing what is, these days, considered essential infrastructure leads to recurring and long-term earnings. Uniti takes advantage of this by leveraging cheap credit offered for its predictable income streams to accelerate growth through acquisition.

Ron Shamgar commented on the company’s potential:

UWL [Uniti] will benefit from a variety of emerging thematics such as 5G, IoT and data centres… With a strengthened property market, UWL will also have an opportunity to win market share from the NBN on the back of their acquisition of Opticomm, which has a big presence in the residential market.

The fund manager added that superfunds are managing such an exorbitant amount of money that they are scrambling to find appropriate places to invest it. Mr Shamgar concluded the possibility of Aware Super kicking the tyres on this ASX share in the near term.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers Limited. The Motley Fool Australia has recommended Integral Diagnostics Ltd and Uniti Group Limited. 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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