4 Retail Takeover Targets: Kingfisher plc, Marks and Spencer Group plc, ASOS plc And Next plc

Here are four retailers whose stocks don’t price in any M&A premium right now, but could be takeover targets: Kingfisher (LSE: KGF) (NASDAQOTH: KGFHY.US), Marks & Spencer (LSE: MKS), ASOS (LSE: ASC) and Next (LSE: NXT).

Kingfisher: Too Bad To Be True

Kingfisher, the owner of B&Q, has a market cap of £7bn. Its shares are trading some 30% below their one-year high. Based on cash flow multiples, Kingfisher stock trades at a 30%-plus discount against its peer group, which is not justified based on Kingfisher’s fundamentals. The DIY retailer’s forward valuation also suggests Kingfisher shares trade well below fair value.

Kingfisher has been well managed over the years, in my view, and I believe that management will find a solution, and quickly. Investors overreacted to a recent profit warning, and although more troubles shouldn’t be ruled out in the short term, if its shares continue to be under pressure, Kingfisher may become a target for The Home Depot, whose stock has been looking for direction for more than a year.

marks & spencerM&S: A Bargain At This Price?

A takeover of Marks & Spencer has rumoured for ages, and there’s no certainty the British retailer will receive a takeover offer this year. A change of ownership has become a distinct possibility, however, because M&S shares are flat in 2014, but they have lost more than 15% of value since the record high they recorded in February. They also look cheap based on M&S’s trailing performance and forward trading multiples. 

With a market cap of £7bn, M&S is an attractive target for Qatar Investment Authority, which can easily garner support from private equity. M&S shares trade at an enterprise value to earnings before interest, taxes, depreciation, and amortisation of 7.3x and 6.8x for 2015 and 2016, respectively. M&S is cheap enough to attract an opportunistic bid.

ASOS: Still Expensive?

ASOS shares have lost 56% of value this year. Two profit warnings hit confidence, and investors don’t seem to be willing to back a business that is likely to continue to grow revenue at a face pace, but whose operating profitability is deteriorating. Competition in the online space is increasingly challenging, and ASOS is paying the price of a valuation that needs growth and high margins to continue to rally. 

The shares trade at an enterprise value to earnings before interest, taxes, depreciation, and amortisation of 33x and 24x for 2014 and 2015, respectively. ASOS has a market cap of £2.2bn. As I recently argued, while there’s no certainty that an offer will materialise, potential suitors – such as Bestseller – may exploit difficult trading conditions for the company and a low valuation. 

NextNext: A Strong Buy

Next is the less troubled retailer in the UK, in my view, as proved by its latest trading update this week. Next raised guidance for revenue and profits, and is expected to deliver an astonishing growth rate into 2019. In fact, I think this is a very solid equity investment. With a market cap of £10bn, it’s not the most obvious takeover target by size. The shares trade at an enterprise value to earnings before interest, taxes, depreciation, and amortisation of 11.6x and 10.9x for 2015 and 2016, respectively, which seems fair value. A merger with GAP would make lots of sense….

Shares of UK retailers such as ASOS and M&S could be a risky bet if volatility springs back. So, don't forget to diversify your portfolio at this point in the business cycle.

You should consider a larger and diversified food maker in weeks ahead. It could surprise on the upside and has been included by our analysts in research that investigates the "5 Golden Rules For Building A Dividend Portfolio".

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool owns shares of ASOS.