Despite UK stocks recently reaching all-time highs, in many cases valuations aren’t overblown. And with private equity and large-cap enterprises taking advantage, investors have seen a flurry of acquisitions and takeovers being executed.
For shareholders of takeover targets, that’s translated into impressive, sudden gains. For example, Alpha Group International surged by over 25% in a single day back in July, with Deliveroo delivering similar gains just a few months before.
Clearly, investing before a takeover is announced can lead to some explosive results. And there could be more deals on the horizon with rumours of takeover bids circulating for several FTSE shares, including ITV (LSE:ITV), Hiscox (LSE:HSX), and Serco (LSE:SRP).
Sadly, rumours and reality don’t always cross paths, and suspected bids may never happen. Therefore, investors can often achieve better results by treating a potential takeover as a bonus rather than a leading reason to buy. With that in mind, is there a potential opportunity with these three stocks?
The three stocks
Takeover speculation surrounding these businesses is being driven by a variety of factors. But one common theme among these businesses is their relatively cheap-looking valuation, which could mean opportunity for smaller investors regardless of takeover talk. For reference, on a forward basis, the price-to-earnings ratios of these UK stocks hover between an inexpensive 9 and 14.
However, there are other potential catalysts beyond valuation:
- ITV – repeated reports of interest in acquiring the group’s Studios segment by RedBird IMI and Banijay to take advantage of the firm’s global monetisable content portfolio, paired with ongoing licensing deals
- Hiscox – increased takeover activity within the London-listed insurance sector as bolt-on acquisitions for larger international players to expand into the UK market
- Serco – rising investment interest in the defence and government services industry, combined with the group’s operational improvements and expanding order book, makes it potentially attractive to bidders
Is a takeover likely?
As previously demonstrated, investing before a takeover is announced can yield some lucrative returns. However, it’s an exceptionally risky strategy given that rumours often don’t turn out to be true, even with early signals such as strategic review announcements.
Having said that, looking at these three potential deals, ITV seems the most likely to be targeted given the recurring interest from third parties. That obviously doesn’t guarantee anything.
Therefore, long-term investors need to focus more on the underlying business rather than speculating on a potential buyout. And encouragingly, ITV does show some promise here.
Total streaming hours continue to climb by double digits, annual non-content cost savings are expected to reach £45m this year, and organic revenue growth is on track to recover with profit margins normalising as content investments are trimmed.
The company still remains highly sensitive to the cyclicality of the advertising sector. Given that ad-based revenues lie at the centre of the group’s business model and its flagship ITVX platform, this can create some tricky situations, especially in the current macroeconomic climate.
Nevertheless, I feel there’s a solid investment thesis to be made here for the long term. But investors will need to investigate further to determine whether the risk’s worth the reward for all three of these British stocks.
