Sky News published a story late Friday afternoon of a potential takeover of AIM-listed satellite operator Avanti Communications (LSE: AVN) by FTSE 250 rival Inmarsat (LSE: ISAT).
The news outlet reported that: The approach from Inmarsat was a preliminary one and talks between the two companies remain at an early stage, according to people close to the situation.
Inmarsat scotched the story in a regulatory news release at 07:00 this morning, stating it hadno intention to make an offer for Avanti. Furthermore, it seems Inmarsat didnt approach Avanti, but was contacted by Avantis advisers.
Ill come on to look at Avantis prospects shortly, but first what of Inmarsat, whose shares moved higher when the market opened.
One to watch
Inmarsats shares had seen a strong multi-year rise up until the end of 2015, but have fallen 31% this year. Oversupply in the industry, weakening demand and intense pricing pressure have been behind Inmarsats disappointing performance. But has the market over-reacted?
It doesnt seem so, because at a current share price of 781p, Inmarsat is trading on a forward price-to-earnings (P/E) ratio of over 22 and with a dividend uncovered by earnings. Furthermore, with some analysts suggesting based on commentary from other operators that the industry outlook is tougher than Inmarsats board seems to have indicated, I believe this is a stock to watch rather than buy for the time being.
A risk too far
Ive been bearish on Avanti Communications since first writing about the company in 2014 when the shares were trading at 230p. Theyre now at 25p, valuing the lossmaking and cash-burning firm at 37m.
Avanti has gross debt of over $640m in junk bonds, needs to raise $50m of equity to secure additional debt facilities, and has also put itself up for sale. Inmarsats disinterest seems telling, as do downgrades from major credit rating agencies. Moodys, for example, sees a default by Avanti over the next 6-12 months as almost inevitable and deems the likely recovery rate for bondholders to be in the 35%-65% range in an event of default.
In such circumstances, the equity would be worthless. In my opinion, the risk here is so high that the only course for a prudent investor is to sell the shares.
Demanding valuation
Im not sure why oil services company Northbridge Industrial Services (LSE: NBI) was pleased to announce its half-year trading update this morning, because it warned on profits and its shares dived 11% to 75.5p, extending a 12-month decline to over 60%.
The company, which is valued at 20m, has a reasonable balance sheet and reckons it can continue to ride out the current turbulence in the market with confidence. Looking forward to 2017 and 2018, it sees some reassuring announcements from the oil service majors. However, with the 2017 forecast P/E standing at 47, I dont see a great deal of value at this stage.
A top small-cap stock
The right small-cap stocks can make for great investments, and the Motley Fool’s analysts have unearthed what they believe is a grossly mis-priced smaller company. The company in question is in an industry where small margin improvements can make a huge difference to the bottom line. And our experts see compelling reasons why this particular business could be set to deliver just that.
You can read their exclusive research on this under-the-radar growth opportunity in a FREE report, 1 Top Small-Cap Stock From The Motley Fool. Simply CLICK HERE for your copy!
G A Chester 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.