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Should You Buy Xchanging Plc On Capita PLC And Apollo Global Management LLC Proposals?

Shares in insurance software business Xchanging (LSE: XCH) have gone through the roof today after it announced that two rival companies have made bid approaches.

The first is Capita (LSE: CPI), which made an approach to Xchanging on 11 August with a non-binding proposal to purchase the company for 140p per share in cash. This idea was swiftly rejected by Xchanging’s management team, which felt that the bright prospects of the company were significantly undervalued at that price level. Capita then upped its potential bid to 145p, with the same response from Xchanging, before increasing it for a third time to 155p per share in cash.

At this point, Xchanging decided to share certain information with Capita regarding the company’s business plan, with Capita’s response being to again increase its potential offer to 160p per share in cash. Xchanging then granted due diligence access to Capita.

Separately, Xchanging has also received a non-binding proposal from Apollo (NYSE: APO.US) to acquire the firm for 170p per share in cash. The board of Xchanging has, therefore, granted due diligence access to Apollo and, with it being the higher of the two potential bids, it seems to be in pole position at the present time.

Clearly, there is no certainty that a bid from either Capita or Apollo will be forthcoming. However, with Xchanging appearing to be making strong progress with its current strategy, it seems probable that at least one of the two companies will follow through with its initial interest by making a formal offer for the company.

As a result, shares in Xchanging have soared by over 50% to trade at around 167p each. This, though, may not fully reflect the value of the business, since it equates to a price to earnings (P/E) ratio of 18.6. This may appear to be rather high at first glance, but Xchanging is forecast to grow its bottom line by 17% next year, which means that it trades on a price to earnings growth (PEG) ratio of just over 1. As a result, a price above 170p per share could easily be justified.

That’s especially the case since Xchanging released a very encouraging set of first half results recently which showed that its BPS and technology businesses performed well in the first half of the year, with their outlook being upbeat and the company’s management team anticipating continued robust performance in the second half of the year.

Although Xchanging’s share price has been a major disappointment in 2015, with it being down 28% prior to today’s announcement, it may be the case that a price of more than 170p is realised. That could either be through increased bids or by the company delivering on its upbeat future prospects which, even after today’s 53% gain, do not yet appear to be fully priced in.

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Peter Stephens 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.