Shares in Spectris (LSE:SXS) are up 66% today (9 June) as the FTSE 250 company has received a £4.4bn takeover offer from private equity firm Advent International.
The share price had been falling for some time and it caught my attention a little while ago. So the question I’m now asking myself is why I didn’t buy it before?
Precision instruments
Spectris is a manufacturer of high-tech instruments. There are a few businesses of this type listed on the UK stock market, including Renishaw (which I don’t own) and Judges Scientific (which I do).
Recently, the precision manufacturing industry has had a problem. A lot of it happens in China and a combination of trade uncertainty and a weak Chinese economy has created demand uncertainty.
In terms of Spectris specifically, the company has an outstanding history of growing its dividend over time. But its free cash flows in 2024 came in at just over half the amount it returns to shareholders.
Obviously, a firm can’t pay out more in dividends than it generates in cash. So unless the situation improves, investors should be very cautious around the likely future returns.
In its financial statements, Spectris reports that it generates around 18% of its overall revenues from China. But it doesn’t provide a geographical breakdown of operating profits (only by division).
That’s why I didn’t get around to investing in the stock before – I didn’t think I could accurately evaluate the risk of a (likely) recession in China. But that now looks like quite a bad move.
Takeover
Unsurprisingly, the Spectris share price has jumped significantly on the news. But investors might still think it’s not too late to consider buying the stock ahead of a possible takeover.
The company currently has a market value of around £3.3bn, which is 33% short of the £4.4bn that’s being quoted as the potential takeover price. And that might look like an arbitrage opportunity.
There is, however, a catch – the £4.4bn figure is an enterprise value that includes the FTSE 250 company’s debt. In terms of what shareholders might receive, the offer is closer to £3.7bn.
In other words, the stock is trading about 10% below the value of the acquisition bid. That’s much less of an opportunity – and there are still risks involved that investors need to be wary of.
On top of this, there’s also a risk that the deal might not go through. Spectris might not accept the offer, or it could fall through further along the line.
In that situation, the share price might well fall back to where it was before today’s sudden jump. And that’s something else investors should be prepared for.
Final Foolish thought
I’ve avoided investing in Spectris recently, because I didn’t have a clear enough long-term thesis for the business. Specifically, I wasn’t able to assess the risk of a potential recession in China accurately.
I could have had a quick win on my investment, but I don’t think I have anything to regret with my decision. A takeover bid isn’t something I could have foreseen.
In general, I view my investment decisions as mistakes when I miss something I ought to have seen. But I don’t think that was the case with Spectris, so I’m looking to other long-term opportunities.
