Why Shares In Mothercare plc Spiked Today

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: Baby products retailer Mothercare (LSE: MTC) has rejected two takeover approaches from Destination Maternity, the US company revealed today. The 300p per share proposal in cash and shares valued Mothercare at £266m. Shares of Mothercare jumped 11% to 259p in early trade. 

So what: Destination Maternity, which is the world’s largest retailer of maternity apparel, has not ruled out a revised bid. The firm stated its proposal at the beginning of June “provides a strong basis for discussions between the parties”.

The deal would see Destination Maternity form a holding company in Britain for tax purposes and the shares would be listed in the US. So far Mothercare, which issued a profit warning in January, has refused to engage in discussions.

Mothercare said it rejected the bid due to the “insufficient value attributed to [our] significant prospects”. The board claims its strategy as an independent company “would create significant value for shareholders”.

Now what: To comply with the Takeover Code, Destination Maternity must announce whether it intends to make a firm offer for Mothercare by 30 July.

Mothercare is down 33% year-to-date and after this morning’s price movement the shares trade at 23 times forecast earnings. Mothercare does not expect to make a profit on its British operations until 2016 at the earliest.

Turnarounds are often risky investments and there may be better opportunities for outperformance elsewhere in the market. Could Mothercare beat "Motley Fool's Top Growth Stock", for instance, which could double profits within four years?

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Mark does not own shares in Mothercare.