The Motley Fool

3 food and drink takeover targets? Diageo plc, Compass Group plc and Britvic plc

Today’s half-year update from food services company Compass (LSE: CPG) shows that it’s making encouraging progress. For example, revenue increased by 5.8% versus the same period from last year, while earnings per share rose by 8.1%. Furthermore, the company’s restructuring appears to be having a positive impact with Compass reporting that cost savings from the changes it’s making are starting to come through. And with the US performing well and Europe being stronger than many investors expected, Compass’ future prospects are very bright.

With Compass having increased its bottom line in each of the last five years, it’s a relatively reliable growth play. And with its earnings due to increase by 8% this year and by a further 9% next year, it could be of interest to a potential suitor. After all, such consistent growth is hard to find in today’s uncertain world. However, with Compass trading on a price-to-earnings (P/E) ratio of 21.9, a bid seems unlikely as a premium would need to be offered and this may make a deal prohibitively expensive.

Good value

Also offering upbeat growth potential is beverages company Britvic (LSE: BVIC). Like Compass, it has a strong track record of growth with its bottom line having risen at an annualised rate of over 19% during the last three years. Britvic is expected to record a rise in its bottom line of 5% in the current year and a further 6% next year. And longer term, it has a sound stable of brands through which to deliver better earnings growth.

With Britvic trading on a P/E ratio of 15, it appears to offer good value for money. That’s at least partly because the beverages sector tends to trade at a significant premium to the wider index, so there seems to be scope for a major upward rerating to Britvic’s valuation. And while it may yield a below average 3.3%, Britvic’s dividend is covered almost twice by profit, which indicates that it could rise at a brisk pace. As such, it seems to be a worthy long-term buy, with a bid being possible.

Star buy

Meanwhile, Diageo (LSE: DGE) remains a top quality company trading at a relatively attractive price. It has a superb stable of brands that provide it with a wide economic moat versus rivals and means that Diageo’s profitability is relatively robust and consistent. This could hold appeal for a potential suitor and with Diageo having a strong presence in specific drinks categories such as whisky and vodka, it could complement and diversify a sector peer’s offering.

Looking ahead, Diageo is expected to increase its net profit by 9% next year and while it trades on a P/E ratio of 21.5, it could easily demand a premium from a bidder due to its excellent long-term prospects in the emerging world. As such, Diageo has real bid potential but even if it’s not acquired, its own growth prospects and margin of safety makes it a star buy for long-term investors.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Britvic 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.