3 Troubled Takeover Targets: Premier Foods plc, Balfour Beatty plc And Enterprise Inns plc

Volatility has come back with a vengeance in the last few days of trading. Shares of banks, insurers as well as those of more cyclical businesses have been battered. Similarly, as one would expect, shares of financially troubled companies have struggled.

Is this a blessing in disguise for shareholders at Premier Foods (LSE: PFD)Balfour Beatty (LSE: BBY) and Enterprise Inns (LSE: ETI)?

“If their equity values get hammered they may soon become takeover targets,” I was told. Not so fast.

It Could Get Worse

Investors should avoid Premier Foods, I said on 9 June. Back then, I added that Balfour Beatty and Enterprise Inns were also un-investable.

Premier Foods stock is down 12% since, while Balfour Beatty’s has lost 8.3% of value. The valuations of both companies fell after profit warnings were announced.

Enterprise Inns is the worst performer, and its stock is down 14.2% in less than five weeks of trading.

More To Do At Premier Foods

Premier Foods managers should consider drastic changes if they are serious about getting their business back on track.

“Grocery manufacturers are struggling to adapt to the online world and need to invest in smarter packaging, presentation and supply chains to reap the long term benefits,” Reuters reported on July 1.

According to Rabobank analyst John David Roeg, who was quoted in the article, “an online migration would ultimately lead to better consumer data and therefore less product inventory throughout the supply chain.”

As a result, short-term liquidity — such as inventories as well as credits and debts with less than one year of maturity — should be easier to manage.

In spite of recent improvements, the food maker is still troubled both operationally and financially. Premier Foods must be at the forefront of technology to beat competitors and needs more disposals to get its finances in order.

In its current form, this ailing food maker is a very unlikely takeover target.

Balfour Beatty: Prized Assets On The Block 

Balfour Beatty stock is getting cheaper but debts are rising, while tight cash flows remain a problem.

Asset disposals will continue, and all management can do right now is to pursue divestments that may render Balfour Beatty a more palatable takeover target. The sale of prized assets represents a necessary U-turn in strategy for a business which needs to raise fresh funds to sort out its finances. 

Balfour Beatty has been in restructuring mode for three years. It has yet to turn the corner.

Alternatives are thin on the ground, however, and I believe its payout is at risk. As several analysts have noted in recent months, the company has given up its dream to become a truly “global construction and professional services company”, yet with a market cap of £1.5bn is small enough to attract interest from Chinese buyers eager to expand abroad.

More Equity For Enterprise Inns

Enterprise Inns is a decent business with a capital structure that is simply untenable. Estimates for earnings per share growth to the end of 2016 are way too bullish, in my view.

Furthermore, price increases will only marginally help it grow revenue, which I expect to remain subdued for several quarters. Meanwhile. volumes are unlikely to pick up significantly. 

Enterprise Inns isn’t too big to merge with a domestic player, but its overstretched balance sheet represents a big hurdle in any negotiation with third parties. Its finances are not reassuring and a cash call should not be ruled out, either. 

Finally, if volatility in the broader stock market spikes, its stock will get much cheaper — so there’s no reason why buyers should act now.

It's going to be a roller-coaster ride in the next few weeks of trading. These three companies will likely underperform their sector rivals, but cherry-picking shares of stronger competitors will be a tough mission, too.

So, as our team of analysts suggest, don't forget to diversify your portfolio at this point in the business cycle.

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Alessandro Pasetti has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.