Holders of UK gaming company Sumo Group (LSE: SUMO) will be enjoying a huge jump in the company’s share price this morning, thanks to a takeover bid. I don’t think this growth stock will be the last to fall at the hands of an overseas suitor either.
Another UK growth stock is snapped up
Today, it was revealed that an agreement had been reached for an all-cash sale of Sumo to Chinese internet giant Tencent. Under the terms of the deal, each existing owner will receive 513p for every share that they own. All told, this values Sumo at £919m.
I think this represents a great return for holders and gives a premium of roughly 43.3% on Sumo’s share price of 358p at last Friday’s close. Before today’s announcement, those who had snapped up a stake in this company just a year ago would have near-doubled their money. Today, that gain became just over 180%!
Sumo isn’t going cheap either. Before this morning, shares were already trading at 40 times forecast earnings. At today’s bid price, the valuation is now an eye-watering 58 times earnings. That’s a meaty price for Tencent to pay. So, as much as I hate to see a promising UK growth stock fall into the hands of the Chinese giant, I wouldn’t blame holders for giving the deal two thumbs up.
Then again, we could still see a bidding war erupt. This exact scenario played out with fellow UK gaming stock Codemasters not long ago.
Who will receive a takeover bid next?
While Sumo has been a great UK growth stock, the name of the company was unlikely to be on the radars of many in the market. However, today’s news shouts out two things to me.
First, the gaming sector continues to be white-hot. In fact, I think this space could be one of the investment themes of the next decade when the growing popularity of eSports is taken into account. For this reason, I wouldn’t blame holders of Team 17 and Frontier Developments for licking their lips over potential deals.
Second, news of today’s bid is yet another indication that the UK market remains attractive to overseas/private equity firms. Morrisons is one big name that’s set to be sold. I think FTSE 100 broadcaster ITV, luxury goods firm Burberry and price comparison site Moneysupermarket.com might be next. Then again, I would say that — I own all three!
The only problem with all this is that no one knows for sure who will receive a bid (other than those making it!). For this reason, I’d never buy a stock solely on the possibility that it might be taken over. I need to be confident that each of the companies I own is robust enough to survive on its own. To do otherwise would be risky. This is especially true if the company was already going through a period of wobbly trading. Takeover offers can be great when they happen. However, they must never be presumed.
What I’d buy now
So, congratulations to holders of Sumo. While there could be another chapter of this tale to go, I’d already be turning my attention to finding other UK growth stocks to fill the eventual void in my portfolio.
Having tumbled in price recently, one in particular really catches my eye.
Paul Summers owns shares in Burberry, ITV and Moneysupermarket.com. The Motley Fool UK has recommended Burberry, Frontier Developments, ITV, Moneysupermarket.com, and Morrisons. 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.