Bidding War

After the market closed on Friday, Whirlpool announced “that, after full and careful consideration, it does not intend to make an offer to acquire the entire issued and to be issued ordinary share capital of AGA”.

Whirlpool reserves the right to make or participate in an offer for AGA within the next six months following the date of the announcement, it added — but by then AGA may well already have new owners. 

It’s easy to speculate that there might have been problems with the take-out price and the financing mix that Whirlpool was ready to offer. 

After all, the valuation of AGA dropped today to a level that is in line with the value per share of the offer that was put forward by US-based Middleby in mid-July. Back then, the boards of Middleby and AGA announced the terms of a recommended cash deal, which was agreed at 185p for each share of AGA.

A bidding war is now unlikely. Frankly, the shares of the target look fully valued at anything above 150p a share, given that they currently change hands at a premium of 80% against their undisturbed price of 104.25p as of 16 June. 

Would you be better off investing in AFC, then?

Volatility

AFC is a great recovery play, according to a top-down approach. Based on fundamentals, the firm is delivering — but the problem is just how much you are willing pay for its forward earnings. Incidentally, no specific news pushed today the stock in a rising market today.

The shares, which traded around 10p in early January, now change hands at 35p, but only a couple of months ago they were priced at their 52-week high of 60.8p. I am concerned about thin volumes, too, and this is another element that suggests caution. 

On Thursday, AFC announced that it remained “on target to deliver on each of its two final Milestone’s at Stade, namely Milestones 10 and 11, in accordance with earlier timeframes“. The stock rose as much as 8% on the day, based on a trading update that essentially added little to the investment case.

Ultimately, you must be prepare to add volatility to your portfolio if you decide to snap up AFC stock.

Even under bullish estimates for earnings, its stock would trade on projected net earnings multiples of between 25 times and 45 times, according to my calculations. Meanwhile, its market cap of £100m implies a price-to-book value multiple of 10 times. My simple advice is to keep an eye on break-even for free cash flow, which might signal the right opportunity to buy into a sound growth story. 

The post Why AGA Rangemaster Group Plc & AFC Energy plc Are Falling Today appeared first on The Twelfth Magpie.

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Alessandro Pasetti 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.

The post Bwin.party Digital Entertainment Plc, AGA Rangemaster Group Plc & Latchways plc: Can The Merger Mania Continue? appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
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Owain Bennallack has no position in any shares mentioned. The Motley Fool UK owns shares of Latchways. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Elsewhere, the shares of Latchways (LSE: LTC) and Exillon Energy (LSE: EXI) have also caught my attention today. They are up 48% and 7.7%, respectively, in a plunging market, with the FTSE 100 down 2.6% at the time of writing. 

Aga Rangemaster On The Up

This is great news for shareholders, but how much risk does the trade carry now? 

When initial takeover news emerged in mid-June, AGA stock surged over 30%; back then, it announced that it was holding discussions with US-based Middleby, which offered 185p in cash for each AGA share soon after, valuing the equity of the target at about £129m. 

Whirlpool may or may not make a formal offer, yet the stock of AGA currently trades at 203p and could seriously offer more value to shareholders. Whirlpool is expanding abroad, and AGA would be just a bolt-on deal, so its suitor could well overpay for it. 

Frankly, these situations are ideal for opportunistic traders, but I am after long-term value so I’d likely give it a pass, although more upside is possible. 

Goodbye Latchways

Latchways, a maker of protection systems, said today that it had agreed to be bought by US-based MSA Safety for an enterprise value of £114m.

Under the terms of the acquisition, Latchways shareholders will receive 1,100p in cash for each share they own, which implies a 53% premium over Latchways’ share price on Friday.

Its share price’s 52-week range is between 705p and 1,068p, and it appears clear that its shareholders are being offered a fair deal. The group has never recovered from the plunge in its valuation at the end of 2014, which came in the wake of a profit warning last autumn.

I’d say that this is the best outcome for shareholders, given that the outlook for many of its end markets is still problematic. 

Exillon Energy: Too Risky?

A risky bet (as its price to book value indicates), the stock of Exillon Energy is perhaps the most appealing investment of the three, having risen 7.7% today following the release of a trading update today that showed:

• Net profit down by 45% to $13.2m ($23.8m in H1 2014);

• Earnings before interests, taxes, depreciation and amortisation down by 40% to $30.4m ($50.7m in H1 2014);

• Production down by 7%, with the average production for H1 2015 equivalent to 16,643 bpd.

Operating costs have fallen, but negative working capital should be closely monitored, although capex requirements are covered by its cash balances over the short term. 

“As at 30 June 2015, the outstanding debt had reduced to $54m, as a result of scheduled repayments of principal. Our net cash position was $5.2m,” Exillon also pointed out. 

In short, it could have been much worse: its stock now trades at 108p, or some 20% above the 52-week low of 90p of last week. I am tempted!

Oil prices had risen almost 20% in less than a week but they are down over 3% today on the back of weak factory data from China, which testifies to a highly volatile market environment. I am still convinced that Brent crude oil will trade around $80 per barrel by the end of the year following a less aggressive production policy by the OPEC — well, to me at least, this will be what it takes to invest in Exillon and other similar oil players!

The post Why AGA Rangemaster Group Plc, Exillon Energy Plc & Latchways plc Are Surging Today appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

The bid from US buyers The Middleby Corporation (NASDAQ: MIDD.US) was first mooted in June when Aga announced it was in discussions with Middleby, which also owns US range oven manufacturer Viking.

The board of Aga has unanimously recommended today’s bid, and Aga shares have now risen by 91% in just three months. As I write, the stock is trading at 181p, about 2% below Middleby’s offer price.

The question for shareholders is whether to sell now or hang on in case a better bid emerges.

Why sell?

There are two reasons to consider selling. Firstly, the Middleby bid could fail. The failure of this bid would be likely to send Aga shares tumbling back down towards the 100p mark, where they trading before news of a possible bid emerged.

I don’t expect this to happen, however, as Middleby already has commitments from shareholders representing 19.1% of the firm’s share capital.

A second and more valid reason to sell now is simply to get the cash more quickly. At present, the acquisition is expected to complete towards the end of the third quarter or during the fourth quarter of 2015.

However, the current market downturn means that investors may want to free up cash now in order to invest in new opportunities.

Should you buy or hold?

Of course, this offer may not be the end of the story. A competing, higher bid could emerge. Today’s 185p offer only values Aga shares at 10 times 2016 forecast earnings, which seems quite modest.

Indeed, back in June, broker N+1 Singer valued Aga’s core brands at 310p, based on a valuation multiple of 10 times underlying earnings.

The only problem with this logic is Aga’s monster pension fund, which had assets worth £867m and a deficit of £69m at the end of 2014.

At the end of last year, Aga’s pension deficit was equal to its market capitalisation. That’s too much for a small company to handle. Prior to today’s offer, Aga had already agreed to make additional pension contributions of £20m by 15 January 2016 and up to £15m more by 2024.

Pension deficit reduction payments like these have been eating away at Aga’s cash flow, preventing dividend payments and restricting investment in the business. Aga has effectively been running to stand still.

Middleby, which is a much larger company and has a market value of around $6.8bn, intends to honour Aga’s pension commitments and will fund the two £10m payments required over the next six months.

However, alongside this, Middleby will be able to provide new lines of distribution and new marketing channels for Aga products, while also funding investment in its product range. It seems very likely that the Aga brand will do better as part of a larger group than it would do alone.

The final word?

Today’s offer has the backing of Aga’s board, its two largest shareholders and its pension scheme.

I’d be very surprised if a better offer comes along, so I will not be buying Aga shares following today’s news.

The post Is AGA Rangemaster Group Plc Still A Buy After £129m Middleby Corp Cash Bid? appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head 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.

Its stock surged over 30% on Wednesday in late trade, after it confirmed that it was holding discussions with Middleby of the US regarding a possible cash offer. As is usually the case when a formal proposal is being crafted, Rangemaster warned that “there can be no certainty that any formal offer will be made, or as to the terms of any offer.”

The pressing question now is: should you buy or sell it at its current level? 

For the record, the target manufactures and distributes upmarket kitchen appliances and interior furnishing, with most of its revenues in the UK and Europe. The would-be suitor produces and markets food services and food processing equipment, and is growing fast outside of the US. 

Offer Or No Offer? 

Middleby said today that its board of directors is in “preliminary discussions regarding a possible cash offer for AGA Rangemaster Group,” and you can bet that the take-out valuation of Rangemaster, which following today’s rise stands at about £100m, could be the sticking point.

Of course, the market is betting on a blow-own offer. After all, with a $6.1bn market cap, Middleby dwarfs Rangemaster and such a bolt-on deal would be just a nice add-on to its existing assets. 

It’s not so easy, however — here’s why. 

Valuation & Pension Deficit

Middleby has shown over the years a great deal of financial discipline, and it won’t pay over the odds simply because the target is relatively small, attractive British business which, of course, has its appeal — but also has weaknesses. 

Furthermore, Middleby stock — whose performance reads +441% over the last five years — trades on incredibly high multiples for such a business, which is justified by its outstanding track record — but that also means that rather than paying hard cash, Middleby could easily decide to offer a deal mainly financed by its own equity. 

Not all equity holders of Rangemaster would likely be pleased with that. 

Another hurdle could be represented by target’s pension deficit, which  may determine a discount to fair value. Finally, it’s worth considering that Rangemaster’s revenues and costs have similarly grown over the years, and that its current equity valuation, following Wednesday’s spike, puts it on a core cash flow multiple that does not seem justified in the light of the actual benefits that Rangemaster may bring to Middleby. 

Deals defy logic most of the times, but if Middleby’s track record is anything to go by, I don’t think a huge premium to its unaffected share price of 104p a share will be easy to achieve. 

The post Don’t Bet On A Blown-Out Cash Offer For AGA Rangemaster Group Plc! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alessandro Pasetti 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.

So, in an attempt to discover some of the market’s future stars, here are five UK small caps that look cheap compared to their projected earnings growth. 

Hot stocks

Utilitywise (LSE: UTW) tops the list of the UK’s hottest growth stocks.

Currently trading at a forward P/E of 11.7, Utilitywise’s earnings per share are set to expand by 37% this year, giving a PEG ratio of 0.3. A ratio of less than one indicates that the company’s shares are undervalued compared to projected growth.

Utilitywise currently offers a dividend yield of 2.7%, and earnings are set to grow a further 40% during 2016. 

Marketing agency Communisis’ (LSE: CMS) digital transition is gaining traction and the company’s earnings are set to charge higher over the next few years as a result.

Communisis currently trades at a forward P/E of 7.9 and supports a dividend yield of 4.2%. Earnings per share are expected to grow by 39% this year, so the company’s shares trade at a PEG ratio of 0.2.

Moreover, Communisis’ earnings are set to expand 15% during 2016. The company is trading at a 2016 P/E of 6.9. 

Boring but exciting

Trifast’s (LSE: TRI) business is boring, but the company’s growth is exciting. A producer of nuts, bolts and screws, Trifast’s earnings are set to grow by 31% during 2015.

The company is currently trading at a forward P/E of 12.6 and a PEG ratio of 0.4. Analysts’ figures show that Trifast is set to offer a dividend yield of 1.7% during 2015. 

AGA Rangemaster (LSE: AGA) is benefiting from the UK housing boom as demand for the company’s AGA Range Cookers & Ovens grows.

 AGA’s earnings are set to grow by 25% during 2016, which, when combined with the company’s lowly 2016 P/E of 5.1, means that the group is trading at a PEG ratio of 0.2 — that’s astonishingly cheap.

However, it should be noted that AGA has a large pension deficit that it is struggling to bring down, hurting the company’s valuation. 

Undervalued 

Vislink (LSE: VLK) is one technology company that’s missed out of the recent tech bubble.

Vislink currently trades at a forward P/E of 10.4 and supports a dividend yield of 3.1%. During 2015, the company’s earnings per share are set to expand by 19%, indicating that the company is trading at a PEG ratio of 0.6.

Further, earnings growth of 8% is pencilled in for 2016. Using these figures, Vislink is trading at a 2016 P/E of 9.6. The company’s shares are set to yield 3.3% during 2016.

The post 5 Small-Cap Companies Set For Explosive Growth: Utilitywise PLC, Communisis plc, Trifast plc, AGA Rangemaster Group Plc And Vislink plc appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
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Rupert Hargreaves 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.

As a result, all three firms are set to hand over more of their annual profits to their pension schemes in order to eliminate the shortfall. How concerned should investors be about these companies’ onerous obligations to their pensioners?

A pension deficit can be found as “retirement benefit obligations” under “non-current liabilities” on a company’s balance sheet. The number represents the difference between the pension scheme’s assets — investments, such as equities, bonds, and property (even maturing whisky in the case of drinks company Diageo!) — and the present value of future retirement benefits that need to be paid.

The table below shows a selection of financial figures for BT, Aga and Thorntons.

As you can see, Aga’s pension deficit has doubled over the last 12 months, and now represents almost 100% of the company’s market capitalisation, compared with 73% for Thorntons and 20% for BT. Aga’s deficit is also equivalent to 7.5 times the company’s current annual operating profit, compared with 3.9 times for Thorntons and 2.3 times for BT.

Clearly, Aga’s deficit is the most serious, so let’s begin with the upmarket cooker company.

Companies and their pension trustees review the funding of their pension schemes every three years. Aga is currently in the process of doing that. If the existing deficit recovery plan were to remain in place, Aga would pay £4m this year and £10m a year from 2016 to 2021 inclusive, as well as a £30m lump sum contribution at the end of 2020.

With Aga’s annual operating profit currently £9.6m, the business is effectively being run for the benefit of the company’s pensioners. That will continue to be the case for the foreseeable future, even if Aga can grow its annual profits at a faster rate than most other companies. A tangible indicator of the lack of shareholder value here is the absence of a dividend since 2011. The board needs the consent of the pension trustee to pay a dividend, and hasn’t even asked, such is the miserableness of the financial position. In my view, due to Aga’s pension deficit, the company is currently uninvestable.

Thorntons is in the midst of finalising a new deficit recovery schedule with its pension trustee, which will see the annual deficit payment increase from £2.75m to £3.25m. With operating profit running at £9.3m, Thornton’s situation isn’t as dire as Aga’s, but — like Aga — the confectioner hasn’t paid a dividend since 2011.

Thornton’s pension scheme assets contain a relatively high exposure to equities of 65%, versus 28% for BT and 17% for Aga. Less risky assets such as bonds, are seen as more compatible with the nature of pension obligations, and Thornton’s high equity exposure could result in its deficit gaping much wider in the event of a stock market crash.

BT and its pension trustee have just finalised their triennial deficit recovery plan. The numbers involved are much bigger in absolute terms than those of Aga and Thorntons (starting with £2bn over the next three years), and the telecom firm’s extra annual payments also stretch out as far as 2030. However, relative to BT’s own financials, the obligations are less onerous than those faced by the two smaller companies — highlighted by the fact that BT pays a dividend.

Pension deficits have become such a problem of late largely because of low gilt yields, resulting directly from the fiscal policy of Quantitative Easing. Unprecedented low yields have meant unprecedented low discount rates applied to pension schemes projected liabilities. While scheme assets have generally been increasing in value, liabilities have been increasing at an even higher rate.

This situation should reverse when things get back to normal, and is an added reason why I think investors in BT should not be too concerned about the company’s current pension deficit. I also think this factor makes Thorntons investable at the present time — although whether the company’s current business performance merits investment is another matter. The position at Aga, though, is so extreme that, in my view, the stock is currently best avoided.

The post Should You Worry About Pension Payments At BT Group plc, AGA Rangemaster Group Plc & Thorntons plc? appeared first on The Twelfth Magpie.

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