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This FTSE 250 stock rallied almost 50% in October after a takeover announcement. Is it time to buy?

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Hands shaking over a business deal
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FTSE 250 constituent Playtech (LSE: PTEC) had an explosive month in October after it was the subject of a takeover bid from Australian slot machine manufacturer Aristocrat Leisure. The bid for Playtech was 680p per share in cash, valuing the business at £2.1bn. Strangely though, the shares closed at 698.5p on Monday, signalling that there may be further bids to come from other interested parties. Should I attempt to capture the upside from a potential bidding war?

Playtech’s business and opportunity

Playtech specialises in gambling software for online casinos, online bingo, mobile gaming and sports betting. Revenue is forecasted to rise over 7% in the 12 months to December 2021, and by 22% to £1.4bn in the following financial year ending 2022. I can see the appeal of gambling shares right now as FTSE 100 stocks Entain and Flutter Entertainment have performed very well during the pandemic.

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A further huge growth catalyst for gambling shares comes from the US. In May 2018, the US Supreme Court legalised sports betting across the whole country, as prior to this decision a federal ban meant Americans could not legally bet on sports. Now that individual states have been given the green light to legalise sports betting, the industry has been given a huge growth catalyst. GAN, another gambling software provider, recognised this potential and re-listed its shares from London’s Alternative Investment Market to NASDAQ back in May last year.

Bidding wars

So, in a sector that is performing well and with opportunity for growth in the US market, it is understandable why Aristocrat has bid for Playtech. But with the shares trading hands above the bid price, could there be another competing bid to come?

Shareholders in Morrisons had the benefit of experiencing a bidding war this year. Two private equity firms competed to acquire the supermarket chain, with the acquisition eventually being formally approved at a £7bn valuation, or 287p per share. The day before the first takeover bid was announced, shares in Morrisons traded on the market at 178.5p, valuing the company at £4.4bn.

The bidding war raised the value of Morrisons by 59% in a little over four months!

A risk too far

Returns from bidding wars look very attractive, and it’s understandable why I may want to gain this exposure in my own portfolio. However, bidding wars don’t happen too often, and in fact, takeovers can even fail and shares can drop right back down to where they started.

As an example, check out Revolution Bars back in 2017 when shareholders rejected the bid for the company.

For these reasons, trying to chase returns from potential bidding wars just isn’t a strategy for me. There are certain sophisticated investors and hedge funds that attempt this, known as ‘merger arbitrage’, but it is a lot of risk to take on. For me, the best way to gain exposure to the potential bidding war for undervalued UK shares is using an ETF that tracks the FTSE 250. If a bidding war does play out for Playtech, my FTSE 250 ETF will benefit, but while also being diversified across the other 249 stocks in the index.

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Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Flutter Entertainment. 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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