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Will the Halfords share price surge from here?

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It’s been a busy few weeks for Halfords (LSE: HFD). The company released its interim results in November, which I wrote about here. At the time, the Halfords share price jumped over 15% on what was an excellent set of figures.

Then, just this week, the company announced it was acquiring tyre and repair specialist National for £62m. Halfords planned on funding the acquisition by selling new shares. This can sometimes cause a share price to fall if the new shares are sold at a discount to the market rate. Not this time though, as the Halfords share price rose over 6% yesterday after the fundraise completed.

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But can the share price surge further? Let’s take a closer look.

The acquisition of National

I’m generally cautious about acquisitions as an investor. Sometimes they can be a great way to grow a business. For example, when BlackRock bought the iShares brand of ETFs (exchange traded funds) from Barclays, it turned out to be a huge success.

At other times, a company’s management might be looking to diversify the business into other sectors. Integrating a new business into a company can be challenging, particularly if management has little experience in the sector itself. It’s easier for me to buy shares in other companies myself so I diversify my portfolio.

I think Halfords’ acquisition of National could be a great one though. National is a tyre and automotive servicing, maintenance and repair business, so it fits nicely into Halfords’ current operations. Indeed, Halfords says it will secure its position as the UK’s largest vehicle service, maintenance and repair business.

Financially speaking, the acquisition is expected to be accretive to earnings as soon as the first full financial year after the investment. This is another good sign in my view.

Funding the acquisition

Halfords proposed to fund the acquisition by selling new shares. When companies do this, there’s always a risk for current shareholders of dilution (owning less of the business than they currently do).

However, Halfords was able to raise £63.4m by selling shares at the going market price of 320p. This is a sign of strong institutional demand for the shares.

Will the Halfords share price surge?

I view this acquisition positively. It’s in a sector that Halfords knows well, and will be earnings accretive in the first full year of operation. The fact that the fundraise was at the market price makes it more attractive as a potential shareholder.

With any acquisition though, there’s always an integration risk. It’s never a guarantee that two separate businesses will work well together. There could also be additional costs involved that haven’t been considered by Halfords’ management team. This happened with London Stock Exchange’s recent acquisition of Refinitiv, and the share price has suffered for it.

Taking everything into account, I think the Halfords share price will do very well from here. Analysts seem to think so too. The consensus target share price is 461p, which is a potential return of 35% as I write. 

So, for me, Halfords is a strong buy for my portfolio.

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Dan Appleby owns shares of London Stock Exchange Group. The Motley Fool UK has no position in any of the shares mentioned. 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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