1 potential takeover target from the FTSE 100

With the shares down 53% over the last 12 months, Stephen Wright is wondering whether Burberry could be leaving the FTSE 100 via an acquisition.

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A number of UK stocks have been emerging as takeover targets recently. But there’s one from the FTSE 100 that I think might be going under the radar at the moment. 

The stock is Burberry (LSE:BRBY). After a 53% decline over the last 12 months, I think there’s a chance some of its bigger rivals could start seeing an opportunity.

Out of fashion

It’s fair to say Burberry shares have fallen out of favour with investors recently for a few reasons. Some – but not all – have little to do with the business itself.

A cyclical downturn in consumer spending has been weighing on demand for the company’s clothes. This has been most notably true in China, which accounted for 27% of sales in 2022.

But Burberry’s problems aren’t just due to a difficult macroeconomic environment. Since 2019, its sales growth has been consistently weaker than its European rivals LVMH, Kering, and Hermès.

LVMH saw its sales across Asia increase in 2023, implying the issue isn’t just weak consumer spending in China. There’s something about Burberry that just isn’t firing at the moment.

Takeover target?

As I see it, Burberry has some assets that might make it an attractive acquisition target for a larger company. Most notably, it has a strong brand.

The company’s trenchcoats are arguably a timeless classic. Evidence for this comes from the fact that consumers are willing to pay prices that offset the higher cost of them being made in Britain.

Right now, the stock has a market cap of £4.25bn. The premium needed to acquire the business outright probably makes it a bit high for Kering to consider, but it’s miniscule for LVMH or Hermès. 

It’s also worth noting that both LVMH (27) and Hermès (58) trade at higher price-to-earnings (P/E) ratios than Burberry (10). So there might even be scope to use an expensive stock to buy a cheap one. 

Should I buy Burberry shares?

I wouldn’t be in the least bit surprised to see a bigger company looking to acquire Burberry outright. Part of the reason for that is the stock looks cheap to me at today’s prices. 

Given this, the obvious question is whether I should consider buying the stock myself. After all, if it’s undervalued, there could be an opportunity here. 

I’m not ruling it out by any means, but I’m a little hesitant. I think it makes a lot more sense for LVMH or Hermès to be taking a look at the company than it does for me.

The main reason is that I don’t think I can fix what ails the underlying business. If I had a larger infrastructure to incorporate the fashion brands into, that might well be a different story.

Investing for the long term

Regardless of my view on Burberry’s business, it’s tempting to buy the stock in anticipation of a potential takeover. But that’s a temptation I’m working hard to avoid.

Buying shares in the hope that someone else might pay a higher price for them – even if it might be a good idea – is extremely risky. I’d rather stick to stocks I have a stronger long-term view on.

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc. 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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