As the Ted Baker share price soars on M&A news, is this UK stock next?

The Ted Baker share price has surged higher today on takeover interest. Roland Head highlights another UK stock he thinks could receive a bid.

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The Ted Baker (LSE: TED) share price soared when markets opened this morning after US private equity firm Sycamore Partners said it was considering a possible cash offer for the fashion and lifestyle group.

Quite a few UK companies have received takeover bids recently, but I think there are still some bargains out there. Today, I want to take a closer look at the Ted Baker situation and reveal another UK stock I think could be targeted by cash-rich private equity funds.

Ted Baker shares: too late to buy?

The Ted Baker share price is up by 20% at 118p, as I write. But the stock was trading above this level a year ago.

Since then, the business has continued to recover from the impact of the pandemic. Sales during the 12 weeks to 29 January were 35% higher than a year ago, although they’re still below 2019 levels.

It’s too soon to be sure whether Ted Baker’s turnaround will succeed, but broker forecasts today are pricing the shares on 19 times forecast earnings for the 2022/23 financial year.

Is it too late to buy? Three large shareholders control more than 50% of Ted Baker share, including founder Ray Kelvin. For a bid to succeed, I think Sycamore would have to make an offer significantly above the current share price of 118p.

If I bought TED shares today, I might still profit from a takeover bid. I’m not going to do this though, because there’s no guarantee an offer will be made. If Sycamore loses interest, I think Ted Baker’s share price would probably fall again.

A cheap UK stock

Private equity funds like to buy businesses that generate plenty of cash. One company that’s on my radar at the moment for its strong cash generation and low valuation is electrical retailer Currys (LSE: CURY).

In addition to the well-known UK business, Currys also has market-leading retail brands in Scandinavia and Greece. The company’s turnaround under Alex Baldock has seen profits start to recover and cash flow improve significantly.

With the Currys share price currently under 90p, this FTSE 250 stock trades on just 8.5 times forecast earnings, with a 4% dividend yield. Although profit margins are quite low, this seems attractive for my portfolio, especially as Currys generates plenty of cash.

Indeed, Baldock says that by 2023/24, Currys should be generating £250m a year of sustainable free cash flow. Currys’ current market-cap is just £1bn, which means that the shares are potentially trading on just four times forecast free cash flow. That would be exceptionally cheap, in my experience.

We don’t yet know if Baldock can hit this ambitious target. One risk is that Currys will always be forced to compete on price against lower-cost online operators, including Amazon.

However, I’m encouraged by the group’s recent performance. I think Currys is big enough to continue doing well.

Takeovers are completely unpredictable, so I would never buy a stock purely because I thought it might receive a bid. But I could certainly see a private equity buyer taking an interest in Currys.

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 assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. 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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