This penny share’s merger is under threat. Here’s what I’m doing now!

Jabran Khan details this penny shares merger which is under threat and explains what he’s doing right now in regards to his position.

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British Pennies on a Pound Note

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Penny share Stagecoach (LSE:SGC) has been in the headlines recently and shares have been on an upward trajectory. Should I consider adding the shares to my holdings? Let’s take a look at recent developments before I decide.

Merger issues

As a quick reminder, Stagecoach is a bus, train, tram, and express coach operator with operations in the UK, US, and Canada.

In September, Stagecoach and its rival National Express revealed a potential merger. National Express is a provider of long-distance coach journeys. Well, in December, an agreement was made and SGC shares surged on that news.

As I write, Stagecoach shares are trading for 92p. At this time last year, the shares were trading for 79p, which is a 16% return over a 12-month period. Since the December announcement, the shares have increased by over 20% to current levels. It is worth remembering penny shares are identified by trading for less than £1.

The merger, which looks more like a takeover of Stagecoach by National Express to me personally, is worth £468m. As part of the deal, SGC shareholders receive 0.36 of a share of the combined company. The deal was tentatively set to be completed by the end of this year, but last month, the Competitions and Market Authority (CMA) announced an investigation into the deal. Competition concerns could cause the deal to fail, in my opinion.

An excellent penny share

Putting the potential merger to one side, I believe Stagecoach is an excellent stock with lots of potential ahead too.

Stagecoach possesses a strong brand with a vast profile in key markets. In addition to this, it is involved in a market with little competition.

Prior to the pandemic, performance was strong but restrictions, fear of a spreading virus, and working from home led to performance dropping. Interim results released in December lead me to believe results could be on an upward trajectory once more. Revenue, profit, and earnings per share all rose compared to the same period last year. Passenger levels and sales were edging closer to pre-pandemic levels and net debt had reduced.

Stagecoach does have risks, however. Firstly, many consumers who now actively avoid public transport due to the pandemic and its effect on future choices, may never come back. This could hurt performance and financials over time. Next, there has been a huge labour shortage with drivers affecting operations across all markets, especially HGV and bus driver shortages. When operations are affected, consumer confidence and performance is also affected.

My verdict

I believe a few things could happen with Stagecoach. Firstly, the combination with National Express could go through after the investigation concludes. This will become clearer in the coming months. Or, the deal could fail to pass the CMA investigation and not go ahead. I believe other private equity bidders could swoop in and buy SGC, which could boost the penny share upwards. 

At current levels, I believe Stagecoach is an excellent penny share with an established track record and growth potential too, with or without the merger. It looks very cheap at current levels too. I would add the share to my holdings and keep an eye on developments in regards to the merger.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jabran Khan 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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