The Meggitt (LSE:MGGT) share price exploded by 60% in a single day last week. This recent upward momentum has pushed the aerospace stock up by just over 150% in the past 12 months. And it’s now trading above pre-pandemic levels. That’s some impressive performance, in my opinion. But what caused this enormous growth in the first place? And should I be considering this business for my portfolio? Let’s take a look.
The exploding Meggitt share price
In my experience, seeing a stock surge by double-digits in a single trading day is caused by one of two things. A solid trading update or an acquisition offer. In the case of Meggitt’s share price, it was the latter.
Acquisition rumours have been surrounding this business since May. But on Monday morning, the management team announced it had reached an agreement with Parker-Hannifin for the cash acquisition of the entire company.
The deal is valued at £6.3bn, which translates to a stock price of 800p. Compared to Meggitt’s closing share price of 469p the week before, this offer represents a 70% premium. So, I’m not surprised to see the Meggitt share price explode on the news.
The risks that lie ahead
Today Meggitt is trading at around 717p. That’s about 10% lower than the acquisition price. It seems some investors are selling early due to some uncertainty as to whether this deal will actually go through. And I think they are right to have some concerns.
While I feel shareholders will likely approve the deal, regulators may be harder to persuade. In the UK, all such acquisitions have to be approved by them. However, in the case of Meggitt, things get a bit more complicated. Why? Because the business is heavily involved in the aerospace and defence sector. And thus, national security will be in question.
The UK government has already released a statement saying it’s “closely monitoring” the deal. Should it conclude that this acquisition could compromise national security, it will more than likely block it. And given the Meggitt share price is currently being elevated by the prospect of a buyout, should this decision be made, the share price could quickly crash back down.
What’s next?
There’s no guarantee the UK government will approve the deal. However, Parker-Hannifin is certainly trying to be persuasive. As part of the agreement with the Meggitt management team, legally binding commitments have been put in place. The firm intends to keep all manufacturing jobs and facilities within the UK, maintain current levels of research & development spending, and keep its headquarters in Coventry.
Whether this will be enough, only time will tell. But it certainly improves the odds, in my opinion. Therefore, if I were a shareholder of Meggitt, I would wait to see the verdict before selling any shares below the acquisition price. And as I’m not a shareholder, I won’t be buying as the uncertainty is too high for me.
