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What could a takeover offer mean for the TalkTalk share price?

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Takeover bids are almost always good news. It’s logical that if one firm is interested in buying a business, then others might be too. Perhaps even at a higher value. This is why I’m looking at the TalkTalk (LSE: TALK) share price.

As I write this, it’s up almost 17% on the day after news of its talks with hedge fund Toscafund about a potential offer. This is no doubt good news for current shareholders, but what about potential investors?

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Short-term events

Toscafund, which already owns 30% of the company, has made an approach at 97p per share. The TalkTalk share price was trading at about 85p yesterday. The offer represents around a 26% premium over the company’s average share price from the last three months.

The deal values TalkTalk at about £1.1bn. Including debt, the value of the deal is closer to £2bn. This says a lot about what Toscafund think of the company’s prospects. It’s willing to pay off large swathes of its debt and still think it will be worth it for the potential new owner.

For potential investors, this is interesting too. If this hedge fund thinks it has a good future, who are we to argue? TalkTalk’s large debt level has long been a problem though. If this deal falls through, it’s likely to remain so. A new takeover offer may be a best option for fresh investors. TalkTalk’s natural prospects without one are far more risky.

The main hope for potential investors is that the offer may not be the only one. According to analysts, the deal values the company at about 7 times forecast earnings for 2021. An interesting angle for investors would be if TalkTalk sees an approach from a large telecoms company.

The TalkTalk share price long term

Of course, if this deal goes through with no hiccoughs, then realistically it’s too late for new investors and there’s a chance we’ve now missed the boat. But if a takeover doesn’t happen, what then?

The UK telephone and broadband markets are very competitive. Larger, stronger players are likely to be the winners. The market is already seeing some consolidation. O2 and Virgin Media have already undertaken a £31bn merger. TalkTalk may see more benefit from a takeover by another listed player, such as Vodafone. But this is far from certain to happen.

Personally, I might be tempted to invest in TalkTalk when we know what will happen with this deal — that is, if it falls through. Investing now in the hope that this deal might collapse and a new buyer might step forward is very risky.

For me, waiting in the wings is the risk I’m willing to take. If this deal does get finalised, then no harm, no foul. If it falls through, that’s when I think the TalkTalk share price will be offering an opportunity.

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Karl has no position in any of the 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.