A successful business which encounters a bump in the road can quickly become a takeover target if its share price drops far enough. We saw it last year with industrial suppliers Premier Farnell and Brammer; and now we’ve got textiles specialist Berendsen (BRSN).

Many investors will be kicking themselves that they didn’t buy the FTSE 250 business when its share price took a massive hit last year. French rival Elis is now trying to buy the company, having offered the equivalent of £11.73 in cash and shares for each share in Berendsen.

I am not surprised that Berendsen has attracted takeover interest. Nearly one third of its market value had been wiped off since a nasty profit warning last October with new management blaming underinvestment. That presented a rare opportunity to buy a business with a superb track record of generating shareholder value at a much lower price.

History of rewarding shareholders

Until last October, Berendsen had seen a three-fold increase in its share price over a five year period. Peter Ventress oversaw the creation of significant returns for the business (and ultimately shareholders) when he was chief executive from late 2009 until 2015. Under his tenure, return on capital employed increased from 7.3% to 12.2%, according to data from SharePad.

Predators normally pounce on share price weakness if they have a long term view and confidence they can fix any short term problems. Elis has a good geographic fit and the combined group would have a much stronger position across Europe. It seems to be the perfect buyer and the proposed bid price is fair, according to various analysts.

If Berendsen was such an obvious takeover target, you may ask why I didn’t tell readers to buy the shares since they became much cheaper late last year. I did consider it several times, but I wanted to obtain a better understanding of the problems and why a few analysts had started to turn negative.

Ultimately it is very hard to buy a share that is surrounded by negativity. Investors are often told the best time to buy is when others are fearful, but it takes a lot of guts to press the ‘buy’ button.

What went wrong?

Stockbroker Stifel issued a negative research note in December 2016, implying new boss James Drummond was tinkering with a business that wasn’t really broken. It suggested Berendsen was ‘reaching too far’ in trying to achieve new growth objectives and becoming distracted from day-to-day delivery of operational improvements.

In April 2017, Morgan Stanley said increased UK and European competition was probably the real reason why Berendsen had been struggling, rather than underinvestment. It suggested the company’s 15% return on capital employed target would be difficult to achieve.

Berendsen says Elis’ proposed bid materially undervalues the business. At the time of writing the shares trade at £10.71 –below the £12 to £13 level enjoyed by investors last year. I believe Elis will keep fighting to get the company… and win.

For the rest of us, let Berendsen and the other opportunistic bids be a lesson to cast an eagle eye on any sudden valuation weakness in a business with a strong historic track record.

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