The FTSE 100 is better known for dividend shares than semiconductor companies. But that doesn’t mean its stocks can’t explode higher.
Shares in Segro (LSE:SGRO) are up at least 16% today (Wednesday 24 June) on news of a takeover bid from Prologis. And it’s turning into a familiar theme for UK investors…
What’s on the table?
The offer from Prologis prices Segro at 925p per share. That’s a 24.6% premium to Tuesday’s closing price of 742p.
Sounds good. But it’s exactly equal to the firm’s stated Net Asset Value (NAV) at the end of 2025.
It’s an opportunistic move from Prologis. Segro’s board has unequivocally rejected the offer, but there are a couple of things to consider.
One is that UK real estate investment trusts (REITs) typically trade below NAV. So investors who want to sell might not get a better opportunity.
I suspect, however, that most shareholders aren’t looking to sell. The main reason to own REITs is passive income, not capital appreciation.
REITs benefit from tax advantages that come from returning their income to shareholders as dividends. But there’s an even bigger reason to be wary.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
What’s the catch?
Prologis isn’t offering anything above full value for Segro shares. But on closer inspection, it’s actually worse than that.
The deal is all in stock. And Prologis shares currently trade at a 145% premium to its NAV, which changes the equation.
It means Segro would swap net assets worth £1 for net assets worth 41p. That would be like selling a warehouse for £100 to buy an identical one for £245.
As a result, the adjusted value of the deal is well below 925p per share. That’s why the FTSE 100 firm rejected the deal.
Prologis has until 22 July to make another offer — and I think it might well do so. Discounts to NAV have made UK REITs attractive acquisition targets.
Buying Segro shares ahead of a potential bid looks like a tempting trade. But I’m very wary of this strategy.
UK M&A
Looking to frontrun takeover deals is a dangerous game. Gamma Communications is a good example of what can go wrong.
The stock is down around 15% in the last month, without much change in the business. The main difference is that its status as a potential acquisition has changed.
Gamma has gone from having four potential buyers to one. And the share price has been falling as a result.
Management has been actively exploring the possibility of a sale. But the prospect of a bidding war driving the price up has disappeared – at least, for now.
The case with Segro isn’t identical – the offer from Prologis was unsolicited. Investors, however, should be wary of the similarities.
In both cases, the thing to focus on is the company’s long-term prospects. Ultimately, that’s what offers the most protection from the risks of investing.
What to do
Segro’s qualities — supply-constrained locations, long-dated leases, consistent dividend growth — don’t disappear if the deal falls through. But at current prices, the margin of safety has narrowed considerably.
The more useful lesson from this week is to find those qualities elsewhere — before someone else does. The UK REIT sector is shrinking, so the chance to own quality logistics assets at a discount to NAV might not be around forever.
Should you invest £5,000 in Segro Plc right now?
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Stephen Wright owns shares in Gamma Communications.
