MENU

1 Interesting Potential Takeover Target for Contrarian Investors

In an age where finding value opportunities has largely given way to a search for momentum stocks and growth gems, it is becoming harder to find companies with decent cash flows at discounts to intrinsic value.

I’m going to take a look at a company which has largely been forgotten by the market, and one which may present an interesting contrarian play for a value-oriented investor looking for a turnaround opportunity.

DHX Media Ltd.  (TSX:DHX.B)(NASDAQ:DHXM) is a children’s entertainment company with a stable of assets which includes PeanutsStrawberry ShortcakeTeletubbies, Inspector Gadget, and Degrassi franchises, among others. The children’s entertainment sector, while traditionally very profitable, has become increasingly competitive and consolidated, leading to the belief that eventually DHX will be forced to sell or swallowed up by competition in the near to medium term given the changing landscape in this sector in North America.

The intellectual property held by DHX Media is what will be the focus of any company looking to acquire DHX. In recent quarters, DHX has continued to underperform, and the company’s stock price has reflected the pessimistic outlook of the market with respect to the long-term prospects of this company moving forward. The drop of more than 25% for DHX’s share price over the past 12 months has turned the company into an attractive target, with the company’s management team indicating it will indeed be considering strategic alternatives, including a potential sale, should the transaction result in a net benefit for shareholders.

Fellow children’s entertainment company Spin Master Corp.  (TSX:TOY) could be one company in the running to add these assets to its already impressive and growing base of children’s toys and entertainment assets. Spin Master has continued to grow its licensing and television segments — a segment which would see an immediate and accretive boost following such an acquisition, and one which may prove to be very profitable for both sides should DHX indeed be looking to sell.

Bottom line 

DHX Media is a decent business in a relatively indecent competitive position in a growing industry. I anticipate that within the next 12-24 months, a business transformation, sale, or partnership will be on the table for this firm, as the company looks to survive in an increasingly competitive and consolidation-oriented industry.

For investors looking to play a Spin Master/DHX takeover bid, I would recommend buying long-dated put options on Spin Master and long-dated call options on DHX, along with a net long equity position on both firms moving forward.

Stay Foolish, my friends.

Canada's answer to Amazon.com

You've probably never even heard of this up-and-coming e-commerce powerhouse headquartered in Eastern Ontario...

But, despite coming public just last year, it's already helping the likes of Budweiser... Tesla... Subway... and Red Bull move $9.9 BILLION (and counting) worth of goods online each year.

And now it's caught the eye of the legendary investor who got behind Amazon.com in 1997 -- just before it shot up over 23,000% and made investors like you and me rich beyond their wildest dreams.

Click here to discover why this investor says it's time to buy.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.