A FTSE 250 company I own shares in has received a takeover offer. It’s 23% higher than the current share price and aiming to conclude this year – but I’m not happy about it.
The stock is Dowlais (LSE:DWL), and American Axle & Manufacturing Holdings is the company that has put together a deal worth 85.2p per share for it. The current Dowlais share price is 69.45p, but there’s a lot more to it than this.
The deal
Ordinarily, I’d be pleased to receive this type of offer. Even if I didn’t think it reflected the full value of the company, I’d find something else to do with the cash.
The trouble is, the way the deal is being financed makes things complicated. The 85.2p per share offer consists of the following:
- 42p in cash
- a final dividend of 2.8p
- 0.0863 shares in the new combined company
This amounts to 82p per share based on a couple of key assumptions. The first is American Axle being worth $5.82 per share. The second is an exchange rate from GBP to USD of 1.2434.
Neither of these is outrageous – both were true when the deal was agreed. But things have changed since then and the deal now looks a lot worse for Dowlais shareholders.
What’s happened?
The biggest problem is that shares in American Axle have been falling since the deal was announced. The share price is currently $4.93 – 15% below the level assumed in the takeover.
Since around 40% of the proposed valuation comes from shares in the new company, this significantly reduces the value for Dowlais shareholders. And there’s also an issue of exchange rates to consider.
The value of the pound against the dollar is slightly higher than it was a week ago. And that’s weighing on the potential return for investors in the FTSE 250 company.
As a result, the overall deal looks much less attractive for shareholders like me than it did when it was initially announced. And that gives me a bit of a dilemma.
What next?
When I bought Dowlais shares, the firm was planning to divest its powder metallurgy unit. I expected the proceeds to strengthen the balance sheet and leave behind an attractive car parts business.
That now looks unlikely. However, while while the stock could climb sharply from its current levels if the deal goes through, I wouldn’t be surprised if it doesn’t — at least, not in its current format.
Management has recommended shareholders vote in favour of accepting the offer. But with over 90% of shares in the FTSE 250 company owned by institutions, it isn’t in a position to force the issue.
Rejecting the offer is risky – Dowlais might not find a buyer interested in taking its powder metallurgy business by itself and the business has a lot of debt. So there’s a real dilemma here for investors.
What I’m doing
I nearly never view a stock as a Hold – I usually think stocks are either too cheap (and want to buy them) or too expensive (and want to sell them). But Dowlais might just be the exception.
The stock could climb 23% if shares in American Axle pick up or exchange rates turn favourable, but that’s highly speculative. With so much uncertainty around the outlook, I’m going to sit and wait.
