Should you buy Imagination Technologies Group plc as it goes up for sale?

Imagination Technologies Group plc (LON:IMG) puts itself up for sale: is it time to buy in or bail out?

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Shares in Imagination Technologies (LSE: IMG) soared as much as 20% on Thursday after the chip designer announced it had received interest from a number of parties for a potential acquisition of the company.

Apple

The decision to put the company up for sale comes just over two months after Apple announced that it was developing its own graphics chips and would no longer use Imagination’s intellectual property in its products in around two years’ time. And as Apple accounts for nearly half of Imagination’s annual revenues, the British firm risks losing future royalty payments under the current license and royalty agreement.

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However, Imagination said it believes Apple will struggle to avoid infringing its intellectual property rights, as the US giant has used its technology and intellectual property for many years and because its tech has formed the basis of the Graphics Processor Units (GPUs) in Apple’s phones, tablets, iPods, TVs and watches.

Significant premium

Any potential suitor for Imagination should be able to get the company at a favourable price, at least compared with a year ago, as its shares have lost nearly half of their value since April. This could mean that a white knight bidder may be willing to pay a significant premium to today’s share price, but that’s far from being certain in any way.

Meanwhile, Imagination has been trying to return to profitability by cutting costs and expanding its presence in the rapidly emerging automotive and augmented/virtual reality markets. These new markets could become strong potential growth areas and may, in the long term, generate enough revenues to offset the loss of its licensing deal with Apple.

As for now, some profit-taking is to be expected after today’s strong gains. With this in mind, I’d avoid buying its shares until at least after the company’s full-year earnings release on 4 July.

Billion-dollar acquisition

Elsewhere, Diageo (LSE: DGE) has agreed to pay up to $1bn to buy Casamigos, a fast-growing premium tequila brand co-founded by George Clooney and two other business partners in 2013.

The acquisition is set to help the world’s largest spirits maker expand into a fast-growing market, in which it currently only has a limited presence. Tequila has been the strongest performing category in the US in recent years, with sales up 7.4% last year, compared to just a 2.6% increase for the overall distilled spirits sector.

Casamigos has delivered impressive growth in recent years, with a compound annual growth rate of 54% in the last two years. The company shipped 120,000 cases of tequila in 2016 — and looking ahead, Diageo reckons it is on track to reach over 170,000 cases by the end of 2017. 

Bottom Line

It’s good to see Diageo step up efforts to expand into faster growing markets after years of sluggish organic volume growth. But since its shares have already gained 27% over the past 52 weeks, mostly due to sterling’s weakness, I reckon valuation look a little expensive. That’s because shares in the spirits maker trade at a forward P/E of 21.1, compared to its five-year historical average of 19.6.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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