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Should You Sell Darty PLC & BT Group plc To Buy DCC PLC & Entertainment One Ltd Today?

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Darty (LSE: DRTY) surged over 15% today — could this be a great time to cash in?

Elsewhere, if you are tempted to sell BT (LSE: BT-A), you ought to be patient at least until its interim results are due at the end of October. In the meantime, you should monitor both DCC (LSE: DCC) and Entertainment One (LSE: ETO). The stock of the latter has fallen almost 10% today…

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Low-Ball Bid

Darty hit a 52-week high of 95.25p today as it emerged that it had received a proposal from France’s Groupe Fnac “regarding an all-share offer (…) on the basis of 1 Fnac share for every 39 Darty shares held“. The proposal currently values Darty at 101p per share based on its closing price on 29 September 2015, the group said — adding that the board will explore the benefits of such  a tie-up. Shareholders will be entitled to receive a final dividend of 2.625 cents. A formal offer must be announced by 28 October. 

A low-ball bid financed by equity isn’t exactly the best deal ever, so Fnac could up the ante — I’d sell my holdings today if I were invested, though. If a deal is not agreed, the risk is that your Darty investment will plunge to anywhere between 70p and 80p, hovering around that level for some time based on its growth prospects, core margins and trading multiples. 

Safety

BT is a rather more safe investment, operating in a sector that has inevitably become more volatile in recent weeks on both sides of the Atlantic. Its stock price is getting closer to a 52-week low of 381p; with its 3.4% forward yield, which is a good gauge of risk, I don’t think that BT stock will fall much further, although the enthusiasm surrounding its acquisition-led strategy seems to have vanished.

BT is fairly priced right now but based on its projected growth rate and several other key financial metrics, it is hard to envisage meaningful capital appreciation from a level of 430p/440p, which is well below the average price target from brokers (500p), according to estimates from Thomson Reuters. 

I’ll buy it when I retire, maybe. I want growth right now. 

Growth

I like DCC’s corporate strategy, which combines with a strong portfolio of assets and a clean balance sheet.

Its shares are up 37% this year, and have proved to be particularly resilient in recent weeks. If anything, they look a tad pricey based on forward net earnings multiples of 22x and 20x in 2016 and 2017, respectively. Yet if its management team continues to deliver, earnings and dividends will nicely rise over the period, likely supporting a valuation higher than 5,000p — its stock currently trades around 4,900p, which is 5% below the average price target from brokers. 

I would certainly choose DCC over Entertainment One, which is pursuing a very aggressive growth strategy. Today it announced that it had agreed to acquire 70% of Astley Baker Davies (ABD) for £140m, which implies a rich valuation based on cash flow multiples that are higher than its own. If ABD’s Peppa Pig doesn’t ring a bell, it’s because you do not have kids. 

A fully underwritten £200m rights issue (25% of its market cap) backed the deal, and was arranged by JP Morgan and Credit Suisse. Well, I don’t dislike Entertainment One (my four year-old kid would recommend it following today’s news), and I think its shares are not particularly expensive — but discipline in acquisitions is essential, and clearly the group is pulling out all the stops to chase growth, and that is a strategy that could harm long-term value. 

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

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