Bargain-hunting investors who snapped up shares of Brammer (LSE: BRAM) earlier this year will be smiling this morning. The inventory management and parts specialist has received a £221.5m cash offer from private equity group, Advent International.
Longer-term shareholders will probably be forced to exit this investment at a loss. The bid price of 165p per share represents a 10% discount to Brammer’s share price at the start of 2016, and a 41% discount to the stock’s value two years ago.
Without today’s bid, it seems as though Brammer’s shareholders would have been asked for some fresh cash. In today’s statement, the board said that they believed a turnaround would take “at least three years” and incur “significant cash reorganisation costs”.
In this article, I’m going to consider the outlook for two other firms that I believe have takeover potential.
Are jacked-up profits likely?
AIM-listed Gulf Marine Services (LSE: GMS) runs a rental fleet of self-propelled jack-up support vessels, serving the offshore energy industry. The firm’s fleet is new and modern, and should be attractive to potential customers.
The problem is that Gulf Marine’s fleet expansion has coincided with the oil crash. Customer demand is soft and hire rates have fallen. But because the company’s new vessels were funded with borrowed cash, Gulf Marine expects to end the year with peak net of $395m.
After-tax profits are expected to fall by 52% to $43.4m this year. A further 32% decline to $33.5m is expected next year. I believe there’s still a reasonable chance that Gulf Marine’s debts could force the firm into a rights issue or placing.
However, the oil and gas market will eventually rebound. In the meantime, Gulf Marine’s low valuation means that the firm’s enterprise value (market cap plus net debt) of £493m is significantly less than the £675m value of its fixed assets. A potential buyer could pay a 50% premium for Gulf Marine’s stock, and still buy the company’s assets at less than their book price.
This stock could be cheap
Component manufacturer Essentra (LSE: ESNT) issued its second profit warning of the year on Tuesday. The group is seeing slower growth than expected, across many of its operations.
Earnings forecasts for the current year have now been cut by about 30% since the start of 2016. The share price has fallen by 54%. Essentra shares now trade on a forecast P/E of just 9.5, with a prospective dividend yield of 5.4%.
This dividend looks safe for this year. But debt levels have risen as a result of dividend payments and the weaker value of the pound. Net debt was £433.9m at the end of June, giving the group a net debt to EBITDA ratio of 2.2x. If this rises much further, the dividend could be at risk.
Essentra’s new chief executive, Paul Forman, will take charge of the firm in the New Year. In my view, Mr Forman’s top priorities should be cutting costs to restore the group’s falling profit margins, and reducing debt.
Mr Forman may pull off a stunning turnaround, and could attract a trade buyer. But the firm’s problems may also turn out to be worse than expected. That’s why I’m going to remain a spectator, until we learn more about trading in the New Year.
