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Is the RPC share price a bargain after rocketing 25% on takeover talks?

The share price of RPC  (LSE: RPC), one of Europe’s leading plastic packaging companies, jumped as much as 25% in early trading on Monday. This followed an announcement by the FTSE 250 firm that it’s in talks with private equity groups about two potential takeover offers.

Following recent media speculation, RPC confirmed that “preliminary discussions are taking place with each of Apollo Global Management and Bain Capital which may or may not result in an offer for the company.” The shares are trading at around 830p, as I’m writing, valuing the business at £3.4bn. Is the company now fully valued? Or could the shares, which reached an all-time high of over 1,000p early last year, climb a lot higher yet?

Concerns

When I last wrote about RPC in June, I marked it as a stock to avoid. This was due to my concerns about three things: plastic regulation, potential aggressive accounting masking a weaker underlying business, and a rising number of hedge funds holding short positions in the stock — nine at the time, with positions totalling 6.74%.

RPC’s management set out to appease investor concerns about its balance sheet and cash flows, including by identifying non-core businesses for disposal. However, short interest in the stock continued to rise, with 12 institutions having disclosed short positions totalling 10.22% prior to today’s news.

Still a stock to avoid?

At the current share price, RPC is valued at around 11 times forward earnings and has a prospective dividend yield of 3.6%. The earnings multiple remains relatively cheap, which could suggest there’s further upside for the shares.

However, the interest of private equity is only tentative at this stage. Apollo and Bain both have until 8 October to either announce an intention to make a firm offer for the company or walk away. A bid or bidding war could send the shares higher but I wouldn’t buy the shares as a bet on such an outcome. The concerns I had about the business in June haven’t gone away, so I continue to see RPC as a stock to avoid.

Premier investment

Another company whose shares have recently soared on M&A news is FTSE 100 giant Whitbread  (LSE:WTB). I was very bullish on the stock, which was then trading at around 4,000p. I reckoned there was a potential 30% upside to 5,200p by the end of the year.

My enthusiasm for the owner of Costa Coffee and Premier Inn was due to Whitbread having announced a commitment to demerge Costa. I saw great potential for the two businesses to better thrive as separate entities. But I also suggested there was “a fair chance value could be outed sooner rather than later by a bid for Costa before the demerger.”

On 31 August, Whitbread announced it had agreed to sell Costa to The Coca-Cola Company for £3.9bn. The UK firm’s shares soared on the news and are currently trading at over 4,700p. I believe Whitbread got a good price for Costa and is now strongly placed to focus on its growth plans for Premier Inn. I would still happily buy the stock on its current rating of 18 times forward earnings, with a prospective 2.2% dividend yield.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended RPC Group. 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.