Loxam’s approach for Lavendon follows Belgian company TVH Group’s offer of 22 November. It offered 205p per share for Lavendon in an all-cash deal. TVH also stated that it would be its final offer for Lavendon, which reduces the chance of a bidding war. This means that Lavendon’s current share price of 218p may come under pressure in the short run, since Loxam may yet fail to make a bid. In such a scenario, Lavendon’s share price could quickly fall back to 205p.

Not particularly generous

Of course, the 205p per share offer from TVH could be rejected by Lavendon’s shareholders. In fact, it would be unsurprising if this took place, since it does not appear to be a particularly generous offer. Lavendon trades on a price-to-earnings (P/E) ratio of 11.7 even at its current share price of 218p, which means that at the 205p offer level from TVH, Lavendon would have a P/E ratio of 11.

While Lavendon is forecast to raise its bottom line by only 4% this year and by a further 2% next year, it has long term growth potential. It has made strategic investments in recent years which have not yet come to fruition, while operational improvements also have the potential to boost Lavendon’s financial performance. And with 53% of its sales being generated outside of the UK, Lavendon could benefit from weaker sterling over the medium term.

Likely to remain volatile

Evidence of Lavendon’s appeal can be seen in the valuation and performance of rental solutions peer Aggreko (LSE: AGK). It trades on a P/E ratio of 12.5 and yet is expected to report a fall in its earnings of 12% in the current year.

Furthermore, Aggreko’s earnings have fallen in each of the last three years, while Lavendon’s track record is much more positive. It has increased net profit at an annualised rate of 12% during the period. Once its reinvestment kicks in over the medium term, a similarly high growth rate could be on the cards.

In the short run, Lavendon’s share price is likely to remain volatile. If no offer materialises from Loxam then a fall to 205p seems likely. However, 205p per share does not seem to adequately value Lavendon’s future potential and so that bid could be rejected. If it is, then Lavendon has the potential to move significantly higher. As such, it could be a worthwhile purchase for less risk averse, long term investors.

The post Is Lavendon Group plc a buy on takeover bid? appeared first on The Motley Fool UK.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.