UK shares have been trading at lower valuations than their US counterparts recently. And this has made a number of them stand out as potential takeover targets.
The possibility of a company being acquired isn’t — by itself — enough of a reason to buy a stock. But when a firm with strong long-term prospects becomes an acquisition possibility, I think the situation gets interesting.
Wizz
A lot of investors are actually betting against Wizz Air (LSE:WIZZ) shares. As of this month, at least five firms have disclosed short positions in the FTSE 250 company.
It’s easy to see why and I’ve no interest in buying the stock myself. But the possibility of a takeover is a big risk for investors actively betting against the share price.
Strategically, Wizz is shifting away from its attempt to offer low-cost long-haul flights to focus on the European market. And there are pros and cons to this strategy.
The big advantage is that the low-cost model actually works in Europe. Shorter distances make it possible to fit in more journeys with quick turnarounds.
The downside, however, is that there’s a lot more competition from the likes of easyJet and Ryanair. And a battle over prices can make profits hard to find for everyone.
That’s why I don’t like the firm’s long-term prospects and wouldn’t consider buying it. But Ryanair CEO Michael O’Leary expects Wizz to be acquired as part of a wider industry consolidation, and that could cause the stock to jump.
Tristel
Tristel (LSE:TSTL) is a very different stock – for one thing, the business is actually doing well at the moment. But I think it could still be a potential takeover target.
The company has US approval for its opthalmic wipes, to go with its ultrasound products. These make disinfecting surgical equipment faster and more effective.
While Tristel has a US distribution strategy, being acquired by a firm like, say, Johnson & Johnson would provide an easy route to market. And the stock does look cheap.
The main risk with the company is that its product is expensive. This means convincing US hospitals to buy its products – even if they’re better – won’t be straightforward.
Despite this, there’s a lot to like about the stock — disregarding the possibility of a takeover. A market value of £171m arguably doesn’t reflect the firm’s growth potential.
I sold my Tristel shares earlier this year when the price reached £4.20. But the stock is down 15% since then, and a 4% dividend yield means I’m taking another look.
Takeover targets
Takeover news can cause a company’s shares to jump, but buying on this basis alone is a risky business. That’s why I’m staying away from Wizz — I don’t like the firm’s long-term prospects.
With Tristel, on the other hand, the situation is different. I like the look of the stock even if nobody comes to acquire it, so I think it’s worth considering as a potential buy.
