In Wednesday’s Wide Moat Daily, I mentioned the recent surge in mergers and acquisitions (M&A) we’ve been seeing.
After an exceptionally disappointing start to 2025, things are finally starting to pick up. And it seems like this is only the beginning of an impressive run.
I quoted a Barron’s article, which said, “Mergers and acquisitions are back in a big way, and stocks – big and small – should benefit.” As it also noted, companies ended up striking over $1 trillion in deals between April 8 and July 22 (mostly after April), up 34% year over year.
Even in the past few days, several weeks after Barron’s released its assessment, we saw:
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Keurig Dr. Pepper (KDP) announce its intention to buy Dutch multinational coffee and tea company JDE Peet’s for $18 billion,
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Private equity investment firm Thoma Bravo (TBA) publicize its own offer for software company Verint, and
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TXNM Energy (TXNM) file for official approval for Blackstone (BX) to purchase it for $11.5 billion.
It’s that last one I’m especially interested in, since Blackstone – the world’s largest alternative asset manager – appears to be on a buying spree.
As I wrote yesterday, it also agreed to acquire life-cycle electrical equipment services provider Shermco for about $1.6 billion about a week ago. And at the beginning of August, it signed a definitive agreement to take over data-analytics platform Enver for $6 billion.
Blackstone has made it clear it’s not done yet, so that list is set to grow further – and probably by quite a bit. At the same time, shares of BX are too overvalued to recommend right now.
Instead, I want to look at some companies that could be M&A targets for the firm. This is something I’ve done successfully many times since I first began covering Blackstone more than a decade ago. This includes:
Source: Wide Moat Research
So, today, let’s investigate two other deals it might make in the near future.
Buyout Offers Can Give Instant Stock Boosts
Holding a company when it gets a buyout offer can be exceptionally profitable. Almost without exception, a company’s board only agrees to be acquired at a level higher than their current stock value. And that premium can be substantial.
As I shared in a report published last year:
Investors who own shares of acquisition targets will benefit from M&A premiums. In recent years, the average M&A premium has been roughly 25%. Imagine you wake up one morning and find that a stock you hold has popped 25% overnight. That’s a nice payday for investors who can identify potential acquisition targets.
I’ve seen this play out over and over with real estate investment trusts (“REITs”) I cover, such as PS Business, American Campus Communities, Retail Opportunity Investments, QTS Realty, AIR Communities, Excel Trust, and BioMed.
As shown in the previous chart, these were all companies I recommended prior to Blackstone buying them up.
On July 18, 2024, for instance, I explained that:
Aside from the valuation, there’s another case that can be made for Retail Opportunity Investment that could be interesting. The company could, for a motivated player, be a very attractive takeover target.
Twelve days after my article, the REIT announced it had agreed to be acquired by Blackstone for around $4 billion. The $17.50 per share purchase price represented a 34% premium to the return on invested capital’s closing share price on July 29, 2024 – the last trading day before the big announcement.
Another example worth citing happened just a few weeks ago. I called Plymouth Industrial REIT (PLYM) a strong buy on my YouTube channel (be sure to subscribe here!). I predicted it could generate 30%-plus returns in the next 12 months.
Mere days later, Plymouth said it had received an unsolicited all-cash offer from Sixth Street. Shares surged by over 40% on the news.
This kind of enthusiasm holds true across the entire spectrum of sectors. But since REITs are my specialty, I do have more of a trained eye for real estate M&A.
In that light, I couldn’t help but notice Bloomberg‘s report earlier this week that Elliott Management is taking a sizeable stake in West Coast industrial landlord Rexford Industrial Realty (REXR) – a REIT I’ve been extremely bullish on.
Elliott will likely push it to buy back shares before long. And I wouldn’t be surprised if it also sought to take REXR private. Either that or lobby Blackstone to acquire it.
After all, Blackstone has shown a clear interest in REITs over the years. So, I’ll be watching this one closely.
REXR and the following two companies…
EastGroup Partners Is a Prime-Time M&A Pick
EastGroup Properties (EGP) is another industrial REIT that screams “Buy me!”
EastGroup mostly owns business distribution facilities. You can think of these as upscale warehouses that also double as office space. They serve as a bridge between the producer of a product and the retail location where that product eventually ends up.
It focuses on very attractive markets that are growing faster than the U.S. economy: cities in states like Texas, Florida, Arizona, and North Carolina. Moreover, it maintains a highly diversified portfolio of 64 million square feet, where its top 10 customers represent only 6.9% of annual base rent.
So, if one falls on hard times, it’s not a disaster for EastGroup.
Then there’s its monopoly-like building clusters that allow it to work with its customers’ needs. By holding properties in close proximity, it can better offer space as a customer’s demands grow.
EastGroup has an equally impressive balance sheet with a 16% debt ratio and 3 times unadjusted debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”). It has also generated positive adjusted funds from operations (AFFO – the REIT version of earnings) every year since 2010.
Source: FAST Graphs
Shares are currently trading at 24.7 times, well below its normal valuation of 27 times.
EastGroup’s dividend yield is 3.7%, and analysts expect 8% growth next year. Given its potential for multiple expansion, its steady dividend, and above-average growth…
I’m giving it a total return target of 25% in the next 12 months.
The businesses’ fundamentals are attractive enough. But the discounted valuation also makes it a prime takeover target for a firm like Blackstone.
Centerspace Looks Like Prime Picking, Too
Another prime-time REIT pick is Centerspace (CSR). It’s a multifamily landlord with 13,353 units in the Midwest and Mountain West regions.
This includes high-growth markets like Salt Lake City, Utah, which it has more recently entered. The company has been funding this growth by selling properties in slower-growth areas – such as Minnesota’s Twin Cities, where it sold 12 communities for $220 million in gross proceeds.
Centerspace does, admittedly, have higher leverage, with a net debt-to-EBITDA target range of low- to mid-7 times by the end of 2025. But it also has a low payout ratio of 62%, which allows it to reduce debt with its free cash flow.
As you can see below, Centerspace saw earnings decline from 2017 to 2018. That was when it decided to concentrate exclusively on multifamily instead of a wider array of REIT sectors.
But it has delivered steady growth ever since it finalized those plans to become a pure-play residential landlord in 2019.
Source: FAST Graphs
Better yet, shares are cheap now, trading at a 13.7 times price-to-AFFO ratio compared with its normal 19.5 times valuation. Its dividend yield is 5.3%, and analysts are forecasting growth of just 2% in 2025 due to asset recycling.
But I believe shares could climb to $72 within 12 months, which would translate to a total return of 25%. And, once again, its discounted valuation makes it a prime target for Blackstone, which hasn’t been shy about its ambitions to acquire residential properties.
Before you act on any of these opportunities, keep in mind that there’s no guarantee they will become Blackstone’s – or any other company’s – next M&A target. And you should never buy up a company on just that possibility alone.
Purchase stocks based on how well they fit into your personal diversified portfolio. That and their fundamentals… like their ability to deliver meaningful upside with returns of 25% or higher.
If they get bought out while you’re holding them, that’s just a bonus.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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