UDG Healthcare (LSE: UDG) shares have surged 20% higher this morning after the company said it had received a 1,023p per share cash takeover offer. This FTSE 250 business makes medical packaging and provides marketing services to the healthcare sector.
Here, I’ll explain what I’d do with UDG shares now. I’ll also reveal another healthcare stock I’d like to buy that I think could be a bid target.
UDG shares: I’d sit tight
Private equity firm Clayton Dubilier & Rice has made the cash offer for UDG Healthcare, valuing the business at £2.6bn. It’s been recommended by UDG’s board, so it’s likely to be accepted, unless a competing bid comes along.
At the time of writing, UDG shares are trading at 1,023p exactly. This suggests to me the market is confident the bid will go through. Usually, shares in a company that’s being taken private trade slightly below the takeover price, to reflect the risk that the deal might fail.
Another possibility is that a higher bid could emerge. UDG’s reliable cash flows and US bias makes it an attractive prospect for private equity, as the business should be able to support higher debt levels and fund generous dividends.
Today’s offer values UDG Healthcare shares at 29 times earnings for the 12 months to 31 March. That seems like a full price to me, but I think there might be room for a cash-rich buyer to go a little higher.
If I owned UDG Healthcare stock, I’d keep holding after today’s news. I think the takeover is almost certain to succeed, so the payout should be safe. In the meantime, there’s a small chance a higher bid will come along.
The next healthcare stock I’d buy
One healthcare business I’ve been watching for a while is FTSE 250 medical product company ConvaTec (LSE: CTEC). This business produces medical products needed to care for people with chronic conditions. Examples include colostomy bags and advanced wound care treatments.
ConvaTec only floated on the London market in 2016 and had a slightly rocky start to life as a public company. But things have improved since then and the company is now starting to look like the kind of business I want to invest in.
Firstly, ConvaTec’s products tend to be essential, repeat purchases. This should generate attractive recurring revenue and give good visibility on earnings.
This business is also quite profitable, with an operating margin of 12% in 2020. I can see room for this to improve, supporting strong cash flows.
These are the positives I look for in an investment. But they’re also popular with private equity buyers, as we’ve seen today with UDG shares.
Of course, there’s no guarantee ConvaTec will attract a bid. Any deal would have to win the approval of Danish pharma giant Novo Nordisk, which owns 20% of ConvaTec stock.
Another consideration is that ConvaTec shares already look fully-priced, on 25 times 2021 forecast earnings. That’s a little more than I’d usually pay for a stock.
I’m tempted by ConvaTec’s strong growth outlook and good cash generation. It’s definitely a stock I’m considering for my portfolio.
