There was sweet news today (16 November) for many shareholders in posh confectionery seller Hotel Chocolat (LSE: HOTC), as its share price more than doubled just after the stock market opened, shooting up a very tasty 162%.
What is going on?
Takeover bid by global giant
In short, the company announced that it has agreed to a takeover bid from industry giant Mars.
From Mars’ perspective, I think that makes perfect sense. Hotel Chocolat is a premium brand with a dedicated following. Mars has global manufacturing and distribution capabilities that could allow it to scale Hotel Chocolat’s sales volumes and revenues.
I also think the Mars bar maker’s buying power, size and experience could help the multinational firm boost profit margins as it grows Hotel Chocolat’s international footprint.
The offer is £3.75 per share. In early trading, the share price sat at around £3.65.
Could the price go even higher?
Sometimes a bid attracts a share price premium even over the announced offer price. Here it is the other way around. The Hotel Chocolat share price pushed up close to the bid price not all the way, let alone over it.
Why?
I think that reflects the fact that there is always a possibility, however small, that a takeover can fall through. For example, there can be regulatory concerns when an industry leader buys smaller competitors.
The fact the share price has not risen above the offer price suggests the City is not expecting rival bidders to emerge. That makes sense to me, as the Mars bid is backed by Hotel Chocolat’s board of directors.
Sweet but with a potentially bitter aftertaste
I said above that the news was sweet for many shareholders. Given the huge jump in the share price today, why only many and not all?
Even after today’s jump, the shares trade only 18% higher than five years ago. So shareholders who bought then would not make a 162% return selling today. They would, at least, be able to sell for a profit. Yesterday, their positions were deeply in the red.
But for some shareholders who bought at different times, a successful bid will effectively force them to sell their shares at a loss. That will be an actual loss, not just a paper one.
For example, the offer price is 30% lower than the share price in the run-up to Christmas 2021.
Why valuation always matters
As I do not own Hotel Chocolat shares, this will not affect me directly.
But it underlines once again a key point that can affect all investors. Buying into what one thinks is a great company but overvalued, expecting it to grow into that valuation over time, can end up losing a lot of money.
A bidder can come along and take over a company at a lower share price than you paid. In practice, there is nothing small private shareholders can do in such a situation.
So, no matter how good a company looks, I always consider its valuation before investing.
