Shares in financial adviserAshcourt Rowan (LSE: ARP) have today risen by an incredible 55% at the time of writing after the companys board unanimously agreed to a 97m takeover by Towry Finance, which is a subsidiary of wealth manager Towry Holdings.
The deal will see Ashcourt Rowan shareholders receive 270p per share in cash, along with a principal amount of 5p in loan notes. This represents a premium of 60% of the closing price of Ashcourt Rowan on 30 January, and also represents an incredible 53% premium to the average closing price for the three months prior this this date.
The new entity is set to have around 11bn in assets under management, and will offer a wide range of services that the two companies believe will benefit from a high degree of complementarity. While specific details regarding synergies have not been released, increased scale should help them to better navigate the shakeup of the industry that occurred with the introduction of the retail distribution review in 2013.
While the takeover price undoubtedly represents good value relative to Ashcourt Rowans share price immediately prior to the bid, looking at the companys potential over the next couple of years makes it arguably seem less so. Thats because Ashcourt Rowan is forecast to post earnings growth of 51% in the current year, followed by a further 43% next year and another 23% the year after.
So, while it trades on a price to earnings (P/E) ratio of 21.5 at the offer price, by 2017 this could have come down to just 12.3 if it meets its forecasts. As such, it could reasonably be argued that, when the companys future prospects are taken into account, it may be the case that the offer price is not as generous as it appears to be at first glance.
Clearly, though, many investors in Ashcourt Rowan will be somewhat relieved to receive an offer for their shares. After all, the companys share price performance during the last year has been relatively poor, with it falling from a 5-year high of 200p per share in late 2013, to 167p in recent months.
Meanwhile, looking at the financial advice and wealth management sector as a whole, there could be more consolidation to come. Thats at least partly because increased regulations are impacting firms in terms of administrative expenses and this means that larger scale could prove to be a competitive advantage that allows margins to be expanded and profitability improved over the medium to long term. Therefore, it is likely that sector peers will gain a boost in the short term from increased bid potential.
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Peter has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.