Why has the Stagecoach share price soared?

The sometimes sluggish Stagecoach share price roared into life this week. Christopher Ruane explains why — and his next move.

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Shareholders in Stagecoach (LSE: SGC) may have been surprised to see the bus company’s stock soar yesterday. The Stagecoach share price jumped 25%. In fact, over the past year, it has increased a very impressive 127%.

Here’s why the Stagecoach share price soared – and what I plan to do next as a Stagecoach shareholder.

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On the buses

The main driver for the jump yesterday was news of a potential offer by competitor National Express. It was revealed that the companies have been in discussion about a possible all-share combination. That sounds like a merger, although as the initial announcement floated the idea of Stagecoach shareholders ending up with a quarter of the new company, it looks more like a takeover to me.

At the moment, there is no formal offer. But the fact that the companies have publicly acknowledged the discussions suggests to me that there is a serious prospect of a combination being proposed.

Will a Stagecoach bid happen?

The fact that the discussions are serious does not mean that a merger will necessarily happen, though.

Stagecoach shareholders may not be attracted by any offer that does emerge. While the valuation mentioned would represent a significant premium to the undisturbed share price, Stagecoach shares have fallen in recent years. The possible bid price is 60% below where the Stagecoach share price stood five years ago. So, long-term shareholders may prefer to wait for more price recovery rather than let National Express buy the company at the current deflated price.

Any combination will probably also attract regulatory scrutiny. Stagecoach’s Megabus operations are a key competitor to National Express in the UK coach market. I wouldn’t be surprised if any deal needs to take competition concerns into account.

As we’ve recently seen with supermarket Morrisons, National Express’s interest could spark a bidding war for Stagecoach. While a trade buyer like National Express may see potential cost savings in a tie-up, a financial buyer like a private equity house could have more experience in delivering such cuts. That could help fund a bid at a higher price than currently mooted.

The Stagecoach share price could move sharply

If a bidding war does develop, that could be good for the Stagecoach share price. It could push the price up further.

But the price movement could go in the other direction. There is no actual bid yet – and it may be that none emerges. National Express could make a bid which then gets rejected. In either case, the recent jump in the Stagecoach share price could be reversed quickly.

The price could also move based on underlying business performance, aside from any bid developments. A slow return to office working risks continuing to hurt Stagecoach’s revenues and profits, for example.

My next move on the Stagecoach share price

I own Stagecoach shares. It has only been a couple of months since I identified them among penny shares I’d consider buying for my portfolio, and they are up 25% in that short period.

I wouldn’t be surprised if a bid does materialise for the company. I expect it may have to be higher than the initial price mentioned. But I continue to be attracted by the Stagecoach investment case, independent of any takeover move. So for now I plan to keep holding my Stagecoach shares.

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Christopher Ruane owns shares in Stagecoach. The Motley Fool UK has recommended Morrisons. 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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