Aerospace and defence company Meggitt (LSE:MGGT) is set to be the latest addition to the FTSE 100 index after the quarterly review of the UK market. Along with Morrisons, Meggitt shares are set for a FTSE 100 debut on 20 September.
This is not surprising as Meggitt’s share price has rocketed by 93% in the last six months and 190% in the last 12 months. What is the reason for this uptrend and are its shares a buy for my portfolio today? Let’s take a closer look.
Reason behind the surge
Meggitt agreed with American engineering manufacturer Parker Hannifin to be bought for £6.3bn. The announcement on 2 August of the cash acquisition worth 800p-per-share caused the steep increase in its share prices. Since then, there has been news of a counter-bid from Parker’s rival, US-based TransDigm Group, with a preliminary offer of 900p per share. This bidding war has catapulted Meggitt’s share price to 831p, although not to the counter-bid level.
That counter-bid remains unsolicited and the Takeover Panel, the UK’s regulatory body that oversees mergers and acquisitions, has said TransDigm has until 5 pm on 14 September to make a firm offer or walk away. This means Parker Hannifin remains the frontrunner at the moment.
Worries surrounding the deal
The UK government has kept a close watch on the deal as it raises national security concerns over foreign ownership of companies in the defence and aerospace sector. The government is also wary of the impact of this deal on Meggitt’s 2,300 employees in the UK.
Parker Hannifin has already agreed to contractual commitments as part of the deal. That should ensure that Meggitt retains its presence in the UK after the takeover. The commitments include maintaining Meggitt’s labour force here and a 20% increase in the company’s R&D over five years. If the deal materialises, Parker Hannifin will retain the UK headquarters. And it will honour Meggitt’s pre-existing defence deals with the UK government.
Meggitt seems optimistic about the outcome of the deal, both for the company and as far as easing governmental concerns is concerned. It has provided information about the deal before a shareholder vote on 21 September.
Shareholder concerns
Yet as a potential investor, I feel that the concerns cast a shadow over this deal. As mentioned, the shares currently stand at 831p which is well below the 900p TransDigm bid. Even if Parker Hannifin increases its initial offer to match the rival bid, at Meggitt’s current share price, I feel the risks outweighsany gains on my potential investment.
That’s because, if the deal falls through, I can see the shares sliding back to the pre-takeover news price of 430p. Also, the UK market is subject to an increasing number of bids from overseas businesses. Morrisons is under the takeover spotlight at the moment too. There is too much uncertainty around Meggitt’s shares at the moment for me to consider adding them to my portfolio.
