Thorntons plc Rockets Higher On Takeover Bid

Roland Head explains why today’s cash offer for Thorntons plc (LON:THT) is likely to be a done deal that’s a good result for shareholders.

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Shares in chocolatier Thorntons (LSE: THT) rocketed 42% higher to 144p when markets opened this morning.

The sharp rise was triggered by the news that Ferrero International SA has made a 145p per share cash offer for Thorntons.

Ferrero, whose brands include Kinder, Ferrero Rocher, Nutella and Tic-Tac, said that it had already purchased shares from a number of major Thorntons shareholders, including three directors.

In total, Ferrero says it already owns 30% of Thorntons shares and has received commitments to sell from shareholders representing another 4.46% of Thorntons shares. This gives Ferrero an effective stake of 34.46%.

As a result, the success of this offer seems almost certain. Ferrero only needs to secure a further 16% of Thorntons shares in order to take control of the firm, by controlling more than 50% of voting rights.

Is this a good deal?

Today’s cash offer puts a value of £111.9m on Thorntons, which was trading with a market capitalisation of £70m on Friday.

The 145p per share offer price equates to a 42.9% premium over Friday’s closing price and effectively values Thorntons’ shares on a 2015 forecast P/E of 23, and a 2016 forecast P/E of 16.

This seems fairly generous to me. Since 2009, Thorntons’ operating margin has averaged just 2.5% and its sales have only risen by an average of 0.8% per year. Operating profit has fallen by an average of 2.4% per year.

The current year has been disappointing, too. The firm’s third-quarter trading update showed a 7.6% fall in sales for the first nine months of the current financial year. Earnings per share are expected to fall by 33% this year and to remain below 2014 levels in 2016.

One particular problem has been that Thorntons has been a casualty of the current changes taking place in the supermarket sector. In its third-quarter trading update, Thorntons reported a massive 6.1% fall in UK commercial (wholesale) sales due to a reduction in order from one major customer.

Thorntons’ shareholders haven’t been rewarded for their patience, either. Dividends are a distant memory, with the last payout having taken place in 2011. At the same time, debt has risen sharply. Interest payments account for nearly a quarter of operating profit during the first half of the current year.

Should you sell today?

As I write, Thorntons’ shares are trading at 144.3p, almost exactly matching the Ferrero cash offer price of 145p.

Ferrero could be buying Thorntons shares in the market today, and I expect that it will have the 50.1% majority it needs to take control of the firm very soon.

If I was a Thorntons shareholder, I would sell my shares into the market immediately, as — apart from the dealing cost — there is no extra profit to be made by waiting for the offer to take effect.

By freeing up cash today, you can focus on finding new investment opportunities.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of Thorntons. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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