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We debate the merits of three M&A scenarios
Thursday 16 Mar 2017 Author: Daniel Coatsworth

Investors put money into stocks with the hope of making a profit in the future. You’d therefore expect corporate takeovers to be good news, particularly if they are priced at a premium to the market price. In reality not everyone accepts them with open arms.

Some people don’t like the thought of their investments being taken away against their will; they can become angry at missing out on the opportunity to make more money in the future.

Other investors become irate when companies reject takeovers, seeing it as a missed opportunity to lock in gains as further growth may be harder to achieve. With those scenarios in mind, we now take a look at a few topical takeover situations.

Accept the bid; it’s the best offer you’ll get

Shareholders in gambling group NetPlay TV (NPT:AIM) will soon be asked to vote on a 9p cash per share takeover offer from Betsson.

We’ve heard rumblings from private investors that many shareholders aren’t happy with the price, saying it is less than half the level at which the company traded three years ago.

We believe shareholders should accept the bid as the business faces an extremely tough period should it remain as an independent entity.

NetPlay has been hammered by tougher taxes in the gambling sector over the past few years and the situation will only get worse. An additional tax comes into force later this year on ‘free bet’ offers which will eat into another large chunk of its earnings.

The company lacks sufficient scale in our view and has failed in its attempts to diversify geographically. It doesn’t have the money to make investments to stay competitive. As such, we believe investors need to accept that the share price is highly unlikely to return to its 20p+ dizzy heights seen in 2014.

We see little chance of someone else making a higher offer. NetPlay talked to various third parties in the second half of 2016 and didn’t attract a single bid.

Was right not to have accepted the bid

Palm oil producer MP Evans (MPE:AIM) did the right thing in not accepting a 640p takeover late last year from Asian group KLK, saying that price undervalued the business, its unique position and its future growth potential. It even resisted an upgraded offer of 740p per share.

The bid helped to put a spotlight on certain assets previously ignored by the market. For example, its property assets are worth more than people thought, based on an independent valuation report.

In December when the shares were trading at 655p, the market was effectively valuing the company’s majority-owned plantation assets at $10,000 per hectare. Quoted peers traded at an average $18,600 per hectare, said stockbroker FinnCap, ‘clearly highlighting the value in the shares’.

MP Evans now trades above the second rejected bid at 744.75p. FinnCap believes the shares are worth 835p on a sum of the parts basis.

Should have accepted the bid

One takeover attempt collapsed; let’s hope another bid comes for Premier Foods (PFD) so shareholders don’t have to put up with yet more profit warnings.

According to a recent report in The Sunday Times, a leading investor in Premier Foods is pressing Nissin Foods to make an offer or clear the way for a rival bid.

It regards the Japanese instant noodle leader’s near-20% holding as a blocking stake preventing a sale of struggling Premier Foods. Its £525m net debt is a key reason for our continuing negative view on the stock.

Premier Foods spurned an offer last year from McCormick & Co. Its third and final offer was pitched at 65p in cash, 54% higher than the current 42.25p share price, suggesting Premier Foods should have bitten the US spice giant’s hands off.

Rather than surrendering to McCormick, Premier Foods inked a collaboration deal with Nissin. Since then, shares in the Mr Kipling cakes-to-Bisto gravy maker crashed following a warning (18 Jan 2017) that full year profits would be around 10% lower than previous expectations; its second earnings alert in less than four months.

The company pointed to changing promotional strategies by supermarket customers and ‘significant input cost inflation’ driven by sterling depreciation.

Criticised by hedge fund firm and shareholder Paulson & Co, Premier Foods is also under pressure from activist Oasis Management.

Now its second largest shareholder, Oasis has taken a seat on the board and is working with the food producer to unlock value from a brand portfolio we still view as rather tired. (DC/JC)

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