A couple of UK smaller companies announced they’d accepted takeover offers at the back end of last week.
Premium pubs and hotels chain City Pub Group is set to be acquired by larger rival Young & Co. Its shares leapt 37% on the announcement.
Meanwhile, fancy chocolatier Hotel Chocolat said it’s accepted an offer from US multinational confectionary giant Mars Inc. Its shares rocketed an eye-popping 162%.
What do these takeovers mean for investors? And what do they tell us about valuations in the wider UK smaller companies sector?
Are UK small-cap stocks on offer at bargain prices right now?
Premium ale
The boards of Capital Pub Group and Young & Co announced they had agreed terms for a takeover in a cash and shares deal. For each share Capital Pub’s shareholders own, they will receive 108.75p cash and 0.032658 new Young’s shares.
The implied total value is 145p per share. This represents a 48% premium to Capital Pub’s 99p share price prior to the announcement, and a 65% premium to its average price of 88p over the preceding three months.
Glass half full
Shareholders of both companies will need to vote in favour of the deal for it to go through. And it’s possible another company (like Fuller, Smith & Turner) could come in with a higher bid.
Investors who bought into City Pub Group in the last three months will be pretty happy. Investors who bought in its 2020 pandemic fundraising at 50p a share will be happier still. On the other hand, those who backed the company at 170p, when it was floated on the stock market in 2017, will probably be less chuffed.
Chocs away
Hotel Chocolat announced it had received, and was recommending shareholders accept an all-cash offer for the company of 375p a share from Mars.
This represents a 170% premium to Hotel Chocolat’s 139p share price prior to the announcement, and a 194% premium to its average price of 127p over the preceding 60 days.
Done and dusted
Hotel Chocolat needs shareholder approval for the deal. But with the directors, including the two founders (who each own 27% of the company), being in favour, it looks more or less done and dusted.
Furthermore, given the massive premium Mars is paying, it seems unlikely that any other potential suitor would fancy a bidding war with what is the US’s fourth-largest private company.
Investors who backed Hotel Chocolat at 148p a share when it floated in 2016 will make a decent return on their investment.
But, as with Capital Pub Group, there have been times when Hotel Chocolat’s shares have been attractively priced, and times when the valuation has been less appealing.
Clues to value
The interesting question now — for investors who don’t happen to own shares in City Pub Group or Hotel Chocolat — is whether other UK small-cap stocks are trading in the market at bargain prices.
There are clues suggesting they might well be. The FTSE SmallCap index is 18% lower than its level of two years ago. And the UK’s other main smaller companies index — the FTSE AIM All-Share — has seen a stomach-churning 42% wiped of its value.
In contrast, the large-cap FTSE 100 is actually up by 4% over the same period.
Small-cap diversification
Here at The Motley Fool, we often extol the virtues of owning a diversified portfolio of stocks. By this, we mean investing in businesses across a range of industries and covering a variety of geographical territories.
Investing across the market capitalisation range of large, medium and smaller companies is a further means of diversification.
Now, small-cap stocks are generally considered inherently more risky, and may not be suitable for all investors. Nevertheless, there are many decent businesses within the FTSE SmallCap and AIM All-Share indexes.
And there are more than a few names you’ll likely be familiar with. Cinemas chain Everyman, over-50s insurance and holidays specialist Saga, and retailer Topps Tiles to name but three — in addition to the aforementioned Young & Co and Fuller, Smith & Turner.
Bargain small caps
So, here’s where we are in the smaller companies universe.
The UK’s small-cap indexes are substantially lower than their levels of a couple of years ago.
And trade buyers are currently willing to pay big premiums (City Pub Group) or very big premiums (Hotel Chocolat) to the prices these businesses were trading at in the stock market.
This suggests to me the market could well be offering plenty more UK small caps at bargain prices right now.
