3 Takeover Targets? Burberry Group plc, Diageo plc & Indivior PLC

Rumours last month about a potential takeover bid for Burberry (LSE: BRBY) turned out be false, after HSBC revealed that the 5 percent stake held by the bank was part of a series of trades on behalf of numerous clients rather than a single investor looking to acquire the UK’s biggest luxury goods producer. Shares in Burberry, which had jumped on the news of a potential takeover offer, have since lost earlier gains, but takeover talk is never far away from the company.

This is especially true given that Burberry was one of the FTSE 100’s worst performers last year. Market valuations for the company have come down significantly, with shares trading at 17.5 times expected 2015/6 full year earnings. This compares favourably to its historical average of 22.3 times, and the global luxury goods sector, which has an average forward P/E ratio above 20.

Quality never comes cheap

Market observers seem to think the merger between Anheuser-Busch InBev and SABMiller means a deal for Diageo (LSE: DGE) is off the table. But that may not be the case for long. AB InBev’s acquisition history itself suggests that it is never too far away from its next acquisition; the world’s largest brewer was itself formed through a mega-merger between Interbrew and AmBev back in 2004.

A tie-up between AB InBev and Diageo would give the world’s largest beer brewing company greater access to the faster growing spirits market. Diageo’s near 20% operating margins suggests that the spirits market also benefits from greater pricing power, which is an advantage for building up a wide economic moat. In addition, there are also fewer overlaps between the two companies, making regulatory approval more likely.

Shares in Diageo currently trade at a forward P/E of 21.8. That’s significantly higher than the market average, but quality never comes cheap.

Seriously undervalued

There isn’t much takeover speculation relating to Indivior (LSE: INDV), but the company has all the qualities of an attractive bid target. Spun-off from Reckitt Benckiser back in 2015, the pharma company has great operating cash flow, low levels of indebtedness and attractive fundamentals.

Rising generic competition is eating into the sales of its blockbuster drug, Suboxone, which is used for the treatment of opioid dependence. But the company remains a market leader and longer term fundamentals are clearly in its favour. Indivior may continue to lose market share, but as the market for treating addiction is rapidly growing, the company’s growth prospects remain appealing.

The company has an attractive development pipeline in place, as it plans to launch new and potentially transformational treatments for cocaine addiction and alcohol dependency. Its pipeline of potential treatments have so far been making steady progress at the clinical trial stages, which supports an outlook of continued healthy growth over the medium term.

City analysts expect Indivior to report earnings per share of 16.9p for 2015 and 14.9p for 2016, which puts its shares on a forward P/E of 9.6 and 11.4, respectively. With the market seriously undervaluing its shares, Indivior presents itself as an attractive potential takeover target to its larger rivals.

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