Shares in Punch Taverns (LSE: PUB) are surging today after it was revealed that the company has received not one but two takeover approaches from two potential suitors, one of which is backed by beverage giant Heineken.
The first offer is from Patron Capital Advisers for 174p per share. Under the terms of the proposal, Heineken would buy Punch from Patron immediately on completion of the deal. According to Punch’s press release on the matter, the group is in advanced discussion with all parties concerned with this offer.
The second offer comes from Emerald Investment Partners, the private family firm run by Alan McIntosh, one of Punch’s founders. Emerald’s offer is for 185p per share in cash, although this offer is “conditional on, amongst other things, arranging committed financing, confirmatory due diligence, and the recommendation of the board.”
Punch also warns that as of yet there can be no certainty that any firm offer will be made by either Patron or Emerald. Both suitors have a deadline of 5 pm on 11 January to make an official, firm offer for Punch or walk away.
Time to buy?
Punch’s shares are up by 39% after this deal announcement and are currently trading at 178p, just above the Heineken-Patron takeover offer. As the shares remain below the Emerald offer, it looks as if the market believes this deal won’t go ahead and Patron will win control of Punch. That being said, the fact Punch’s shares are trading above the offer price indicates traders believe Patron might come back with a higher offer to fend off Emerald.
It’s always difficult to predict the outcome of any takeover battle. Patron could make a higher offer, or both bidders might drop their proposals altogether. In this scenario, it’s reasonable to assume Punch’s shares would quickly fall back to pre-bid levels.
With this being the case, it might not make sense to buy Punch right now. Yes, a higher offer could reward investors with a few percentage points of profit, but in the event a deal doesn’t take place, the downside could be as much as 33%. The risk/reward here is skewed against investors.
Look to the long-term
Punch Taverns has always been a dull stock. During the past five years, pre-tax profit has hardly budged, earnings per share have stagnated, and there’s been no dividend for investors. A bid for Punch will give the company’s long-suffering shareholders a profitable way to exit the business.
By comparison, peer Marston’s has grown pre-tax profit from -£136m for 2012 to £81m for 2016 and is expected to report a pre-tax profit of £102m this year. Furthermore, shares in the company support a dividend yield of 5.5%.
So overall, considering the tiny returns on offer and the company’s history of underperformance, Punch Taverns isn’t a buy on takeover chatter.
