Babcock and Restaurant Group

“The FTSE 100 was the best performing major stock market index across Europe and Asia on Monday, rising 0.4% to 7,135. Commodity producers and banks were the key drivers for the blue-chip index, helped by a rising oil price and chatter about HSBC accelerating its growth plans with a new push in Brazil,” says Russ Mould, investment director at AJ Bell.

Babcock International

“Engineering services group Babcock International has got its chin up and is ready to face battle with the mysterious Boatman Capital which is behind a bear raid on the FTSE 250 business.

“Babcock has come out fighting, saying that it continues to have a healthy financial position. It has also responded to accusations of a breakdown in relations with its largest customer, the Ministry of Defence, by obtaining a quote from the Government which says it remains committed to working with strategic suppliers, which includes Babcock.

“While these comments partially addresses some of the criticism from Boatman, one has to question why it has taken Babcock nearly a month to go public on responding to the bear raid.

“Boatman’s research note was issued in October when Babcock traded at 672p; its shares have since fallen by 10% in value.

“There remain unanswered questions regarding Boatman’s allegations of cost overruns on several projects and potentially misleading margin forecasts in Babcock’s full year results in May. Plus there is the allegation that some of the senior leadership team are not fit for purpose.

“Babcock may have pacified its shareholders temporarily with today’s update, yet it has merely given itself a couple of weeks’ breathing space before the big showdown on 21 November when half-year results are reported.

“Bear raids are tricky things to navigate. On one hand, you tend to have a third party which is making allegations in order to profit from a reduction in a company’s share price. On the other hand, they can sometimes serve to highlight negative issues which may have otherwise been hidden from the public eye.

“The major point to consider is whether the accusations against a company are true or false. Bear raids imply a company is guilty until proven innocent and Babcock now finds itself in that situation.”

Restaurant Group

“The Restaurant Group’s announcement of a discounted rights issue to fund its acquisition of Wagamama shows management has not been dissuaded by a negative market reaction to the transaction.

“In one sense this is reassuring. If its faith in the takeover was sufficiently shaky that it could be put off purely by investor sentiment it would suggest there wasn’t much substance behind the move.

“However, it ramps up the pressure on the eateries firm to get the deal right against a weak consumer backdrop and in an arguably over-saturated casual dining market.

“A change in guidance, suggesting the acquisition will be modestly dilutive of earnings rather than accretive in the first full year of ownership, is not a great start.

“Wagamama is at least a strong concept which has outperformed the wider industry for 233 consecutive weeks.

“The existing Restaurant Group portfolio is not exactly knocking the lights out with a 0.5% decline in total sales over 42 weeks, although trading has improved since the World Cup.

“Perhaps the focus should be on continuing to fixing the existing business rather than pursuing an ambitious expansion through M&A.”

These articles are for information purposes only and are not a personal recommendation or advice.