Bloomberg Law recently discussed the global mergers and acquisitions (M&A) market. Their analysis pointed out that even though the 2022 M&A volume is down from a record number of transactions in 2021, the potential deals in 2023 could be pretty standard relative to the pre-pandemic volume.
“This year’s total M&A deal volume was $3.1 trillion as of Oct. 28—roughly 11% behind the total annual M&A deal volumes for 2017 and 2020. But with the typical push to close transactions by the end of the year still to come, 2022 could close the gap,” stated its Nov. 13 commentary.
“Even if we see a Q4 as slow as Q4 2018 (which had the lowest volume of any Q4 since 2017), 2022’s total annual deal volume would surpass that of 2017 and 2020.”
The publication’s analysis suggests that in my quest to find three stocks that could be the next big M&A targets, I ought to start my search here in North America, focusing on software, real estate, real estate investment trusts, commercial services and the internet.
As for the parameters to find my three stocks, I’ll focus on mid-cap stocks with significant revenue growth and larger competitors.
| LNTH | Lantheus Holdings | $56.85 |
| CELH | Celsius Holdings | $97.24 |
| PDCE | PDC Energy | $74.37 |
Lantheus Holdings (LNTH)
Of the three companies on my list, I’m least familiar with Lantheus Holdings (NASDAQ:LNTH), a Massachusetts-based developer of diagnostic and targeted therapeutics to help healthcare clinicians find, fight and follow disease.
In business for more than 60 years, its revenues in Q3 2022 grew 134.4% to $239.3 million, generating $87.5 million in free cash flow. In the fourth quarter, it expects revenues to be at least $243 million, bringing its full-year revenues to $917 million at the midpoint of its guidance with adjusted earnings per share of at least $3.80.
Should the company hit its midpoint estimate for revenue in 2022, it will have grown by 116% over 2021. Based on its current share price, Lantheus stock is trading at just 37.2x earnings and 4.8x revenue.
Who’s going to buy Lantheus? Well, if you look at the company’s 2021 10-K, it mentions GE Healthcare 30 times. It’s a major competitor.
The only fly in the ointment is that it will be a busy year for GE Healthcare in 2023. Early next year, General Electric (NYSE: GE) will spin off its healthcare unit into a standalone, publicly traded company. The unit generates more than $18 billion in revenue; it could easily digest Lantheus, which has a market cap of less than $4 billion.
More importantly, of GE Healthcare’s operating units, pharmaceutical diagnostics has the least amount of revenue — just $2 billion in 2021 — so a pickup of a growth company like Lantheus would accelerate the newly public company’s growth trajectory.
Estimates put GE Healthcare’s enterprise value at between $59 billion to $65 billion, about 20x the size of Lantheus.
Celsius Holdings (CELH)
Celsius Holdings (NASDAQ:CELH) stock is up 76.82% year-to-date and a whopping 2,472% over the past five years. The fitness energy drink company is one of the biggest growth stories of the past half-decade. If it were in the S&P 500, it would have had the second-best performance over the past five years.
In early August, Celsius announced it had signed a long-term distribution agreement with PepsiCo (NASDAQ:PEP). Initially, Celsius only handed off its U.S. distribution to the world’s second-largest beverage company. Down the road, PepsiCo will take over global distribution.
As part of the agreement, Pepsi bought $550 million in convertible preferred stock that paid a 5% annual dividend. If PEP converted the preferred shares to common equity, it would own 8.5% of Celsius. It has one representative on the Celsius board.
Celsius generated $188.2 million in revenue in the third quarter, 98% higher than a year ago. Of that, just $8.7 million was outside the United States. PepsiCo’s global distribution network will turn that amount into merely a rounding error over the next couple of years.
While losing money on a GAAP basis, its EBITDA (earnings before interest, taxes, depreciation and amortization) through the first nine months of 2022 was $57.5 million, 152% higher year-over-year.
The company’s store count in the U.S. was over 174,000 at the end of the third quarter. Expect Pepsi to blow that number well beyond 200,000 in Q4.
Maybe this turns out to be a similar deal to the one Coca-Cola (NYSE:KO) made with Monster Beverage (NASDAQ:MNST) in 2015, and Pepsi’s content with a minority position, or maybe it decides to bite the bullet and take out Celsius?
It would have to appease Carl DeSantis, who owns or controls more than 24% of CELH stock.
PDC Energy (PDCE)
I recently included PDC Energy (NASDAQ:PDCE) in a group of seven companies that I thought were up-and-coming stocks to buy to retire a millionaire. However, I’ve got a hunch that Diamondback Energy (NASDAQ: FANG) might be interested in acquiring the Wattenberg Field operator that also has operations in West Texas.
In the third quarter, PDC produced 219,000 boe/d (barrels of oil equivalent per day) in Colorado’s Wattenberg Field and 31,000 boe/d in the Delaware Basin, which is part of the Permian Basin.
Now, I’m not going to pretend that I’m some hotshot geologist that knows a lot about the oil business.
However, it’s hard not to notice that Diamondback will finish 2022 with production of 385,000 boe/d in the Permian Basin. Adding 31,000 from PDC would undoubtedly help strengthen its hold on this critical area of domestic oil production. Wattenberg would be an excellent diversifier from its existing business in Texas.
This one’s a long shot, given Diamondback is currently digesting FireBird Energy LLC for $1.6 billion in cash and stock.
But buy both, and you’ll be in dividend heaven even if nothing happens in the M&A department.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.