Over the last week, there’s been talk that FTSE 100 insurance giant Legal & General (LSE: LGEN) could be a takeover target. According to the Financial Times, City advisers have said potential bidders have been running the rule over the business.
Could there be an investment opportunity to consider here? Let’s take a look.
What’s going on with Legal & General?
According to the FT, people familiar with the matter say that Legal & General is currently being looked at by a range of financial institutions.
“It’s getting pretty real. People are spending real money on this now,” said one US private capital executive to the publication in relation to firms drawing up plans to bid for the Footsie company.
The FT goes on to say that there’s a trend in the financial services industry right now and that’s alternative investment managers buying up insurance companies.
Recently, firms such as Apollo and Brookfield have been snapping up insurers in an effort to secure sources of low-cost capital to fuel their private credit and alternative investment strategies.
However, it notes that Legal & General CEO António Simões has said the company isn’t considering a break-up or sale right now. “There’s no discussions or anything else going on,” he stressed.
So at present, it’s all just speculation. Note that even if a bid did emerge, there’s no guarantee UK regulators would allow it due to the size of the company and its large holdings of UK government bonds.
The share price is up
Having said that, the insurer’s share price jumped significantly after the article. So clearly, a lot of investors are expecting a bid to come in for the company.
I never think of buying a stock on the back of takeover rumours however, because often buyers don’t emerge. Before investing in a company, it’s important to look at the broad fundamentals.
How do the fundamentals look?
As for how the fundamentals stack up here, they’re a little mixed. On one hand, we have an established, blue-chip FTSE 100 company that’s trading at a low valuation (a forward-looking price-to-earnings (P/E) ratio of 11) and sporting a huge dividend yield (about 8.5%).
We also have a company that has multiple long-term growth drivers. These include index funds, pensions, and private markets.
On the other hand, we have a business with a really complex balance sheet (there could be all kinds of hidden risks here), low dividend coverage (meaning that a cut is a possibility), and little share price growth over the last decade.
We also have a company that operates in a really competitive industry and is up against some much more powerful players. You could also argue that it doesn’t have a clear competitive advantage.
My view
Weighing everything up, I feel the shares could be worth considering for those comfortable with the risks. With the big yield, and talk of a takeover, there are definitely reasons to be bullish here.
That said, there’s a real possibility that the shares could underperform from here. So investors should think about treading carefully with this name.
