Buying a share in a company in the hope that it might get taken over is a risky thing to do. There’s no guarantee that a buyer will ever emerge and you could end up losing money waiting for one to turn up.
Phil takes a look at some prominent takeovers of 2023 and asks whether investors take any lessons from them to spot a possible takeover candidate.
Why companies get taken over
Companies get taken over for lots of different reasons. The main ones are:
- To increase industry competitiveness and gain market share. Often the buyer of a company will be a competitor looking to take a bigger slice of a market and add new customers for its business.
- To break the company up in order to acquire a specific asset such as a brand.
- To add new products and services for its existing customers and accelerate its growth rate.
- By buying a company in the same line of business, an acquirer can often cut a lot of duplicate costs and increase efficiency by selling more products through the same distribution network. This gives the potential to significantly increase profits.
- Buying an existing business may be cheaper than creating an identical one from scratch.
- To take advantage of new assets or hidden assets such as undervalued properties or tax losses.
- To prevent a company becoming a takeover target itself by making itself bigger.
- The target company’s shares are very cheap and offer a very high return on investment for the acquiring company’s shareholders.
These reasons highlight why some companies can be worth more to a trade or financial buyer than they are on the stock exchange.
As with many things in life, hindsight is a wonderful thing. When investors see a company being taken over and have missed out they sometimes kick themselves for not spotting the opportunity beforehand.
But is it possible to spot takeover candidates before they are taken over?
Lessons from prominent 2023 takeovers
Good companies with good products and strong market positions will always be attractive at the right price. A fall in the share price to a new low may give the opportunity for a predator company to launch a bid.
Even companies that are having problems can become targets if those problems are temporary and can be solved by the buying company. Investors often ignore these types of companies because they see the problems as unfixable but a trade buyer might be able to put things right.
If we look at some of the more prominent takeovers that have taken place during 2023, it is possible to identify reasons why they might have been attractive to a bidder.
2023 Takeover Bids
| Company | Pre-offer(p) | % above 1y low | Offer Price(p) | Premium % | Market Value £m | EV £m | P/E(F) | EV/EBIT(F) | Initial ROI |
|---|---|---|---|---|---|---|---|---|---|
| Smart Metering Systems | 680 | 17.9% | 955 | 40.4 | 1300 | 1400 | 62.8 | 36.7 | 2.7% |
| TEN Entertainment | 310 | 27.5% | 412.5 | 33.1 | 287 | 489 | 12.9 | 14.5 | 6.9% |
| Hotel Chocolat | 139 | 36.9% | 375 | 169.8 | 534 | 514 | 195.3 | 111.7 | 0.9% |
| City Pub Group | 99 | 38.9% | 145 | 46 | 162 | 193 | 32.2 | 24.4 | 4.1% |
| Restaurant Group | 49 | 81.7% | 65 | 34 | 506 | 701 | 32.5 | 10.6 | 2.7% |
| Dechra Pharmaceuticals | 2690 | 5.7% | 3875 | 44 | 4459 | 4731 | 30.8 | 23.4 | 4.3% |
Source: SharePad
Smart Metering Systems is seen as a business with very dependable long-term cash flows from its meter assets but also exposure to areas such as battery storage.
Hotel Chocolat provides a differentiated product for a global confectionery giant such as Mars.
City Pubs gives a selection of upmarket pubs in attractive locations that fit well with Young’s existing pub estate.
Restaurant Group has a very attractive asset in Wagamama that could thrive without being offset by less attractive restaurant brands.
Dechra Pharmaceuticals is being bought by a private equity bidder that already has another veterinary business in its portfolio.
Ten Entertainment’s tenpin bowling centres have strong cash flows and steady growth which appeals to its financial buyer.
Do takeovers suggest that the UK stock market is too cheap?
The number of takeovers this year has led many commentators to suggest that it is a sign that the UK stock market in general is cheap. It is argued that if professional investors will not value companies at their true values then trade and financial buyers will step up and take advantage of this situation.
Some buyers will have got themselves a bargain buy but this is not the case for many takeovers.
Looking at the takeovers in the table above, it’s hard to say that they are being bought at giveaway valuations. Of those, only Ten Entertainment looks like it could be on the cheap side with the offer price equating to 12.9 times forecast earnings (a PE of 12.9) with the forecast operating profit (or EBIT) giving a 6.9 per cent on the enterprise value paid (EBIT/EV).
The others look to have been bought at very lofty valuations and will require a significant amount of profit growth to give the buyer a decent return on their purchase price.
The bid for Dechra Pharmaceuticals could be seen as somewhat opportunistic with the bid placed when the shares were less than 6 per cent above their one-year low. Having said that, the buyer will need decent profit growth for the deal to pay off.
Identifying possible takeover targets in SharePad
I’ve put together a very simple screen with the following criteria:
- A share price that is no more than 10 per cent above its one-year low. In other words, sentiment towards the company is fairly poor.
- The business is reasonably profitable. Its trailing twelve-month (TTM) return on capital employed (ROCE) must be at least 10 per cent.
In addition, I have included data on the forecast PE ratio and the return on investment a buyer might get by comparing the forecast EBIT with the current enterprise value (EV).
I have excluded oil, mining as well as financial services shares which have looked cheap for some time.
Possible Takeover Targets
| Name | Market Cap. (m) (£) | Price(p) | 1 y low (low) | Price % of 1 y low | TTM ROCE | fc EBIT (m) % of TTM EV | PE roll 1 |
|---|---|---|---|---|---|---|---|
| AstraZeneca PLC | 156,884 | 10107 | 9851 | 102% | 12 | 8.5% | 15.7 |
| Unilever PLC | 94,678 | 3770 | 3719 | 100% | 20.9 | 10.7% | 16 |
| Diageo PLC | 63,334 | 2809 | 2719 | 103% | 17.5 | 6.3% | 17.4 |
| British American Tobacco PLC | 51,806 | 2291 | 2233 | 100% | 10.1 | 13.9% | 6.1 |
| Reckitt Benckiser Group PLC | 38,563 | 5380 | 5326 | 101% | 14.6 | 7.5% | 15.2 |
| Vodafone Group PLC | 18,752 | 69 | 68 | 100% | 10.7 | 6.4% | 8.8 |
| WPP Group PLC | 7,767 | 731 | 656 | 107% | 14.3 | 12.7% | 7.5 |
| Intertek Group PLC | 6,540 | 4049 | 3747 | 108% | 18.9 | 7.1% | 17.3 |
| Burberry Group PLC | 5,445 | 1495 | 1436 | 103% | 21 | 8.9% | 13.6 |
| Inchcape PLC | 2,744 | 679 | 625 | 107% | 15.1 | 16.7% | 7.3 |
| Tate & Lyle PLC | 2,587 | 652 | 601 | 107% | 13 | 9.2% | 11.2 |
| Greggs PLC | 2,509 | 2483 | 2248 | 109% | 21.4 | 6.5% | 18.4 |
| QinetiQ Group PLC | 1,717 | 303 | 292 | 103% | 16.4 | 13.2% | 10.2 |
| 4imprint Group PLC | 1,282 | 4525 | 4090 | 108% | 117.8 | 10.2% | 15.4 |
| Kainos Group Ltd | 1,212 | 962 | 906 | 103% | 44.3 | 6.6% | 19.7 |
| Telecom plus PLC | 1,210 | 1508 | 1412 | 104% | 36.8 | 10.5% | 13.4 |
| Bodycote PLC | 1,110 | 571 | 545 | 103% | 11.9 | 10.4% | 11.2 |
| Dr. Martens PLC | 893 | 92 | 79 | 102% | 18.6 | 9.9% | 10.2 |
| Future PLC | 717 | 590 | 516 | 100% | 10.9 | 22.3% | 4.5 |
| Barr (AG) PLC | 546 | 487 | 446 | 108% | 15.6 | 9.2% | 13.9 |
| FDM Group Holdings PLC | 449 | 401 | 373 | 105% | 58.9 | 12.1% | 14 |
| Anglo-Eastern Plantations PLC | 270 | 683 | 652 | 105% | 12.6 | ||
| Severfield PLC | 188 | 63 | 57 | 110% | 12.3 | 17.5% | 6.7 |
| STV Group PLC | 88 | 185 | 175 | 105% | 18.8 | 11.3% | 7.1 |
Source: SharePad
The result of the screen is a list which contains some very big and established companies such as AstraZeneca, Unilever, Diageo and Reckitt Benckiser.
Factoring in a 30-40 per cent bid premium to the current share price would make these companies a very big meal for a bidder and one that could be too expensive to finance with lots of debt given that interest rates are a lot higher than they have been in the recent past.
Advertising is a notoriously cyclical business but the forecast valuation of WPP does look very cheap.
Whether anyone would want to take on the risk of buying Future – a company that has been put together with lots of acquisitions – is debatable but if you believe current analyst forecasts, its shares look very lowly valued.
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