Why Centrica PLC May Be A Takeover Target!

It has been a tough few years for Centrica’s (LSE: CNA) shareholders. Political threats, rising costs and stalled overseas expansion plans have all held the company back. 

With these factors weighing all on Centrica’s shares, the company’s market value has been cut in half — Centrica’s as a whole is now worth less than the value of its assets.

However, this bargain basement valuation could make Centrica attractive to a larger peer. What’s more, the company’s leading positon in the UK utility market and rock bottom interest rates will make the economics of any deal highly attractive.

No stranger to speculation

Centrica is no stranger to takeover speculation. Qatar’s state gas firm was rumoured to be looking at the company last year, after signing a £4.4bn gas deal with the owner of British Gas. The two entities have worked together several times in the past, buying billion-dollar North American gas and oil producing business during 2013, so a tie-up is not completely out of the question.

And an offer from Qatar for the company would make a lot of business sense. Qatar has access to plenty of cheap gas and oil, which, if sold to Centrica below-cost, would give the company an edge over its peers here in the UK.

On this basis, a peer from the US could also make an offer for Centrica as the shale boom has unlocked huge reserves of low cost gas across the US. Further, Centrica’s US operations would be attractive to a US buyer. 

The best option

In many respects, this could be the best option for Centrica. Indeed, the company is already struggling with a low return on its assets, as high wholesale energy costs pressure margins.

The group’s return on capital within its power business is significantly less than the group’s cost of capital. And due to high energy costs, Centrica gas fired power generation fleet made a loss of £120m in 2014. Lower energy costs would be one of the many benefits of doing a deal with a larger peer.

Then there’s the issue of regulators to consider. For example, it’s unlikely that the competition commission would allow the takeover of Centrica by another UK utility. Additionally, other regulators such as Ofgem and the CMA are likely to block any deal that would see costs rise for consumers. On other hand, any deal that could lower costs for customers would be encouraged.   

Unfortunately, any deal is likely to be postponed until after this year’s general election. Any buyer will want confirmation from the government that it has no plans to break up energy companies if it goes ahead and acquires Centrica. 

But all in all, it looks as if Centrica would make the perfect takeover target for a larger peer. The company has a leading position in the UK utility market — something money can’t buy — and a buyer would be able to purchase Centrica for less than the value of its assets at present levels. 

Lack of growth

Still, if no deal emerges Centrica is going to struggle to grow over the next few years as high costs and regulation hold the group back -- investors shouldn't expect fireworks from the company any time soon.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.