Stockwatch: The shares that could attract takeover bids

by Edmond Jackson from interactive investor |

A sluggish economy and easy access point to a rise in takeovers. Here are my potential targets.

In recent comment pieces I've quite often mentioned takeover potential - especially among small caps where it can make sense for both parties in a deal, to build market share and achieve economies of integration.

I don't mean to encourage speculating, and only a small minority will come to anything, but it's definitely a factor to be aware of in the current UK financial environment. Should Brexit uncertainties renew weakness in sterling, our relatively open market for corporate control makes UK plc attractive for foreign bidders.

In this piece, I sketch a broad division between targets well established in attractive markets if lacking near-term growth appeal, and those struggling in challenged sectors that leave no scope for management shortcomings.

The former is a better prospect in terms of risk, although these companies tend to require patience – sometimes for years – versus excitement elsewhere.

The latter are more radical e.g. where "scavenger" buyers gain control and might re-base operations using company voluntary arrangement procedures to exit onerous property leases, or merge operations with their own. Here follow some current examples to consider and apply more widely. Group: price comparison websites

I suggested 'Accumulate' this £275 million small cap last March at 62p as four non-executive directors bought shares after full-year results. The chairman then snapped up 17.8 million shares from a jaundiced holder, taking his stake to 29.9%.

This followed a piece last December at 70p when I suggested 'speculative buy' because "the company's margin and cash flow attractions could tempt private equity if the stock continues its fall." 

Market price has risen 45% to test 90p, although that's still down on last year's 140p high, amid just such market talk, although there hasn’t been an announcement confirming an approach.

The sense is that private equity groups potentially want (LSE:GOCO) "WeFlip" technology, or that a car sales website might be seeking to broaden capabilities – there has been precedent here in European takeovers.  

It's a classic example how the stock market lost interest due to a lack of short-term growth appeal, and the stock currently rates at least a 'hold'.

Lighthouse Group: retail/corporate financial adviser

AIM-listed financial adviser Lighthouse Group (LSE:LGT) is being acquired in a £46.2 million deal by wealth manager Quilter (LSE:QLT) (previously part of Old Mutual) to expand its network of advisers and enhance its sales proposition.

Quilter's 33p a share offer is a standard circa 25% premium to market price for control, and comes after Lighthouse's 2018 results were softened by a cautious market for financial advice in the second half-year as people sat through market turmoil. Pre-tax profit rose 5% to £2.6 million on revenue 1.3% easier at £53.4 million, with lower operating expenses compensating.

I originally drew attention two years ago with the share price at around 15p, when the finance director was buying shares and the 2016 results showed pre-tax profit up 119% to £1.9 million; Lighthouse having diversified across a broad spectrum of consumer/corporate advice and wealth management. Affinity contract revenues in particular were up 16%. There was no debt and £8.5 million cash potentially for development.

The stock steadily appreciated then went on a rollercoaster during 2018 – top-of-the-bull-market small cap froth in the first half year savaged by the second half year debacle. Thus, I suggested around the New Year that hard-hit smaller financials were potential 'buys' for 2019 as not much had really changed as to long-term prospects.  

Subsequently, I succumbed to the market's disinterest in not updating Lighthouse after its results, with sentiment mired in the Brexit chaos and a 'hold' seemingly appropriate; what grist to add? 

This takeover shows how bids for well-established small caps – useful as a bolt-on acquisition – can suddenly appear left field.

Findel: opportunistic target in online value retailing and schools supplies

Early last March, Sports Direct (LSE:SPD) - effectively Mike Ashley who seems intent on becoming a baron of troubled retail brands – made a mandatory 161p a share offer, valuing FTSE Small-Cap retailer Findel (LSE:FDL) at £139 million. The bid was triggered as a result of acquiring a stake at this price, thereby taking its holding over the 29.9% threshold to 36.8% requiring a similar offer to all shareholders.

In a charting context, it is outrageous considering the market price was over 300p at the middle of last year, and had since 2015 traded in a circa 150p to 250p range. But who is to blame a canny entrepreneur acting within the rules, gambling that he could get lucky for control if enough holders sell.

After Findel mounted a stout defence, including a letter from its 18.9% shareholder Schroders, acceptances were received from less than 1% of other shareholders.

The group is projected to make annual pre-tax profit around £30 million, an update last January showing revenue from gifts and financial services up 14% in the 15 weeks to Christmas, and the education side easing 9%, although the group was up 11% overall for its third quarter and by 6.5% for its financial year to date, ending 31 March.

Net debt had reduced 30% to £54 million and profit was guided towards the upper end of market expectations. Potentially a stock to 'accumulate'.

Bonmarche: scavenger seizes on marketing failures

Aailing FTSE Fledgling value retailer for over-50's women Bonmarche (LSE:BON) has fallen prey to a clothing turnaround specialist after its long-time private equity owner BM Holdings threw in the towel – selling a 52.4% stake at 11.5p to Philip Day who runs an empire of revitalised brands such as Peacocks, Austin Reed, Jaeger and Edinburgh Woollen Mill.

Bonmarche has advised its shareholders to take no action but, interestingly, on 3 April Cavendish Asset Management raised its stake from 4.6% to 9.7% (the regulatory announcement doesn't cite 4.6%, though Company REFS does), whether that reflects hope that Day will maintain the listing, potentially to reverse in some of his other interests as an integrated group.

Whatever, more radical action to cut costs and revitalise marketing look inevitable. There is some irony at an over-50-year-old man bidding to sort out retail to over-50's women, where several women CEO's have failed to make the Bonmarche concept thrive. Don't assume anything about gender in business!

The company's situation has rapidly worsened in recent months despite no debt and £16 million cash a year or so ago, which had intrigued me as a yield-backed turnaround play; yet Bonmarche's marketing hasn't seemed on-the-ball, like Boohoo's (LSE:BOO) adeptness with younger people. 

I've also been concerned about £38.8 million trade receivables versus £12.6 million trade payables, despite the accounts showing the ratio of current assets to current liabilities as a healthy 1.3 times. Such a working capital imbalance seems to be proving a useful tell-tale of internal trouble at various companies nowadays.

With fresh money I'd take no action here as Day has a controlling position.

Saga: insurance/travel, due more radical action?

Mid-cap so-called "lifestyle group for the over-50's" Saga (LSE:SAGA) has parallels with Bonmarche in the sense that management has failed to fully commercialise the brand. Instead, it has lost value as older folk wise up to online price comparison and Saga frankly hasn't proven competitive enough – insurance is quite like retail in this respect.

In the US, such a company would likely become a target for activist investors pushing for a break-up to unlock value – selling the operations on to insurance/travel groups, to integrate and achieve cost savings.

Speculators/predators may have their spreadsheets up on Saga already, although debt soaring possibly to £900 million to finance cruise ships is testing financial covenants, just when pressures in the insurance industry are likely to persist and older people are cutting back on continental travel due to Brexit.

There is a sense that a 7% yield may provide support in the current high 50p area if the board is able to sustain a 4p per share dividend, although that depends on earnings sufficient for 2 times cover. On 11 April a non-executive director bought 17,444 shares at 56.9p.

I've taken an 'Avoid' stance on Saga since flotation at 185p in June 2014, but was intrigued enough in the New Year by Standard Life trebling its stake over 14% to suggest a 'high-risk buy' at 108p, given the context of a firm overall trading update and 8% yield at the then declared dividend policy.

With hindsight this was premature but, despite the nasty surprise, I wouldn't lose sight of how capitalism may deliver more radical action for Saga. Experienced speculators may therefore want to consider Saga as a 'speculative buy'.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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