While it isn’t advisable to buy a stock solely on the basis that it might be acquired by a deep-pocketed suitor, companies deemed vulnerable to a takeover can often generate nice profits for shareholders.
That’s certainly the case this morning for existing owners of theme park operator Merlin Entertainments (LSE: MERL).
It was announced today that the owner of attractions including Alton Towers, Thorpe Park and Legoworld had received what it considered a “fair and reasonable” cash offer of almost £4.8bn from a consortium including the founding family of the Lego Group (Kirkbi Invest) and private equity firm Blackstone.
Under the agreed terms, shareholders will be entitled to receive 445p per share, representing a 15.2% premium on yesterday’s closing price.
Had you purchased the shares just before US activist investor ValueAct urged the company to go private back in May, you’d be looking at an even bigger gain of 37%.
That’s not to say that all holders will be banking a tidy profit today. In its six years as a listed entity, Merlin has been something a rollercoaster ride for investors with the shares climbing as high as 529p a couple of years ago, only to drop as low as 310p last December.
Notwithstanding this, today’s news makes me wonder which other UK firms could be acquired next. Two immediately spring to mind.
Ripe for the picking
With falling advertising revenues and the recent death of a participant on the now-cancelled Jeremy Kyle Show continuing to trouble the market, I maintain that FTSE 100 broadcaster ITV (LSE: ITV) looks vulnerable to a takeover approach and, perhaps, an eventual bidding war.
With a 9.9% stake, US telecommunications giant and Virgin Media owner Liberty Global still looks the most likely buyer, even though it has long denied being interested in acquiring the business (despite increasing its shareholding).
ITV’s stock currently trades at just 8 times forecast earnings. With a huge content catalogue, an impressive Studios division and recent double-digit growth in online revenue, that looks dirt cheap to me. One only needs to recall the premium that Sky was sold for to see how tasty things could get. Interestingly, it was that very company that sold its stake in ITV to Liberty Global back in 2014.
Even if a bid isn’t forthcoming in the near future, one could argue that the 7.4% dividend yield is reason enough to take a position, particularly if you’re looking to generate income from your portfolio.
In addition to ITV, I also think bookmaker William Hill (LSE: WMH) could become a bid target, especially after the recent $17.3bn deal by Eldorado Resorts to acquire Caesars Entertainment (owner of Caesars Palace in Las Vegas), thus creating one of the largest casino operators over the pond. Last year, the FTSE 250 member announced that it would become Eldorado’s sports betting partner in the US.
Right now, Hill’s shares are trading at their lowest in almost nine years. A forecast P/E of 15 doesn’t scream value on its own but this might not deter buyers if the US market takes off as some believe it will. There’s a 5.7% dividend yield on offer, albeit the extent to which this will be covered by profits is beginning to look questionable.
Given the ongoing consolidation in the industry, William Hill might be worth a (small) punt at its current price.
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Paul Summers owns shares in ITV. The Motley Fool UK has recommended Merlin Entertainments. 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.