I bet you smell the opportunity with AgaRangemaster (LSE: AGA), but youd be wise to consider the risk of betting on its stock at a valuations of 140p, where it trades following the announcement that the British group may be taken over.
Its stock surged over 30% on Wednesday in late trade, after it confirmed that it was holding discussions with Middlebyof the US regarding a possible cash offer. As is usually the case when a formal proposal is being crafted,Rangemasterwarned that there can be no certainty that any formal offer will be made, or as to the terms of any offer.
The pressing question now is: should you buy or sell it it at its current level?
For the record, the target manufactures and distributes upmarket kitchen appliances and interior furnishing, with most of its revenues in the UK and Europe. The would-be suitor produces and marketsfood services and food processing equipment, and is growing fast outside of the US.
Offer Or No Offer?
Middleby said today that its board of directors is in preliminary discussions regarding a possible cash offer for AGA Rangemaster Group, and you can bet that the take-out valuation ofRangemaster, which following todays rise stands at about 100m, could be the sticking point.
Of course, the market is betting on a blow-own offer.After all, with a $6.1bn market cap, Middleby dwarfsRangemaster and such a bolt-on deal would be just a nice add-on to its existing assets.
Its not so easy, however heres why.
Valuation & Pension Deficit
Middleby has shown over the years a great deal of financial discipline, and it wont pay over the odds simply because the target is relatively small, attractive British business which, of course, has its appeal but also has weaknesses.
Furthermore, Middleby stock whose performance reads +441% over the last five years trades on incredibly high multiples for such a business, which is justified by its outstanding track record but that also means that rather than paying hard cash, Middleby could easily decide to offer a deal mainly financed by its own equity.
Not all equity holders ofRangemasterwould likely be pleased with that.
Another hurdle could be be represented by targetspension deficit, which may determine adiscount to fair value.Finally, its worth considering that Rangemasters revenues and costs have similarly grown over the years, and that its current equity valuation, following Wednesdays spike, puts it on a core cash flow multiple that does not seem justified in the light of the actual benefits thatRangemaster may bring toMiddleby.
Deals defy logic most of the times, but ifMiddlebys track record is anything to go by, I dont think a huge premium to its unaffected share price of 104p a share will be easy to achieve.
Either way, I’d rather invest my savings in stocks that areset to growearnings and incomestreamsat a steady pace over the medium term, rather than opting for an opportunistic trade.
If you agree, you should consider ourFREEinvestmentreport, which points to several outstanding valuecandidates — one of which could be taken over as soon as this year, incidentally.
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