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Cape plc surges 45% on offer: will this stock be next?

Cape (LSE: CIU) soared over 45% on Friday after Altrad announced an offer of 265p per share for the industrial services provider. It is an all-cash offer and has been agreed with Cape’s Board of Directors. It values the company at a 46.2% premium to the closing price of 181p per share on 6 July, and is a 17.6% premium to the volume-weighted average closing price of 225p per share for the three months to 6 July.

Clearly, this is positive news for investors in Cape. However, could it be followed by a bid approach for another company which also appears to be a strong buy for the long term?

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Rationale

The deal for Altrad to purchase Cape is a relatively obvious one, with the two companies likely to have a number of synergies if the acquisition goes through. There is a clear strategic fit between the two businesses, and this could lead to reduced costs as well as helping to create a multi-disciplinary industrial services company. At a time when a number of the companies’ end markets are experiencing a difficult period, a merger may provide additional financial strength and resilience should trading conditions remain tough.

A good deal?

Since its operating conditions are challenging at the present time, Cape is forecast to report somewhat volatile earnings over the next two years. In the current year, its bottom line is expected to rise by 17%, before falling by 23% next year. This puts it on a price-to-earnings (P/E) ratio of 9.8 at the offer price of 265p, which suggests Altrad is obtaining the company for a bargain price.

Certainly, Cape’s bottom line could experience more volatility and may even fall over the medium term. However, it remains a relatively sound business in terms of its fundamentals, and it could therefore be worth a higher valuation than 265p per share. As such, while today’s news has pushed the company’s share price significantly higher, in the long run it may have been worthy of a valuation which is above and beyond that reached after the bid approach.

Bid potential

Also offering bid potential right now is building products distributor, SIG (LSE: SHI). It is expected to record a rise in its bottom line of 10% in the next financial year, which indicates it is moving into a more profitable period following a challenging couple of years. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 1.4, which suggests it may benefit from an upward re-rating over the medium term.

Even though the prospects for the UK and European economies remain uncertain, loose monetary policies look set to remain in place over the next few years. They could help support activity levels across the building industry and lead to improved trading conditions. As such, SIG could become a realistic bid target, while also offering upside potential for investors due to its growth prospects and valuation.

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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.