Shares in TeleCity Group (LSE: TCY) rocketed 20% higher when markets opened this morning, after the firm revealed it had received a possible takeover offer of 1,145p per share from US data centre operator Equinix.
The offer would be payable in a mixture of cash and Equinix shares, with approximately 54% to be paid in cash and 46% in stock.
For TeleCity shareholders, todays offer means that the firms shares have now risen by 34% so far in 2015, and by 54% over the last year although its worth remembering that Equinix is still carrying out due diligence on TeleCity and no deal is definite as yet.
Under UK takeover rules, Equinix now has until 5pm on 4 June 2015 to decide whether or not to make a firm offer.
Is TeleCity worth this much?
On the face of it, the Equinix offer puts a pretty toppy valuation on TeleCity, which also issued its firstquarter trading update today.
Todays update confirms that TeleCitys directors expect the firm to meet full-year guidance, meaning that Equinixs possible offer of 1,145p values the firm at 28 times 2015 forecast earnings.
Thats rich but TeleCitys earnings per share have grown by an average of 16% per year since 2009, and the firm enjoys a healthy 25% operating margin. These numbers suggest to me that the advantages TeleCity offers Equinix in terms of greater scale and European coverage probably mean that the price makes sense for Equinix.
What about the previous merger deal?
Todays news may have caught some investors by surprise. Earlier this year, TeleCity agreed a merger deal with InterXion Holding NV that included a restriction on either firm discussing alternative proposals with other firms.
The good news for shareholders, at least is that the InterXion merger deal included a get-out clause, allowing TeleCitys directors to consider another offer, if their legal duties to shareholders required them to do so.
Equinixs possible offer is so generous that shareholders would rightly object were TeleCitys board to reject it outright, so theydont need to worry about the earlier merger deal causing problems.
Should you buy, sell or hold?
Many TeleCity shareholders probably sold their shares after the InterXion merger deal was agreed earlier in March.
It often makes sense to sell when a deal is in the price, in order to free up the money for new investments and avoid the risk of the deal falling through. Unfortunately, this approach does mean that you miss out if a bidding war develops.
I dont think another competing bid is likely, so I wouldnt buy any more TeleCity shares after todays news.
Indeed, I reckon that now could be a good time to sell TeleCity and lock in some gains, as todays offer is not yet a done deal, and TeleCity shares would be likely to fall back to their previous price of around 900p if the Equinix offer is not confirmed.
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Roland Head 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.