The combination of Premier Farnell and Daetwyler seems to be a logical one in terms of their product offerings. Their ranges seem to be a good fit, while distribution channels and geographic footprints may also prove to be complementary. Synergies are also expected to be achieved from the enhanced scale of the combined entity, with synergies from cross-selling and line-fill effects due to be recorded alongside a stronger procurement position.

Trading update

News of the deal was released alongside a first quarter trading update from Premier Farnell, which showed that its trading remains very mixed. Sales growth of 1.5% was recorded in Europe and Asia Pacific continues to be a strong performer with sales being 25.7% up on the year. But elsewhere Premier Farnell continues to struggle. For example, in the Americas sales fell by 9.9% and this means that overall sales were down by 1.4%.

Key reasons for this were negative currency effects as well as a weakening in US manufacturing conditions and competitive pressures. As such, a US sales reorganisation was undertaken last month as Premier Farnell seeks to deliver operational efficiencies, while annualised cost savings of £19m are on track to be recorded in 2017/18.

Looking ahead, Premier Farnell is forecast to increase its bottom line by 27% in the current year and by a further 17% next year. Clearly, these are impressive rates of growth and yet prior to today’s offer from Daetwyler, the company’s shares traded on a price-to-earnings (P/E) ratio of just 10.5. Today’s deal puts Premier Farnell on a P/E ratio of 15.9 and while this may at first glance appear to be generous, it also puts Premier Farnell on a price-to-earnings growth (PEG) ratio of just 0.7.

Cheap buy?

As such, it could be argued that Daetwyler is buying Premier Farnell on the cheap. Certainly, Premier Farnell has endured a challenging period in recent years and has recorded declining profitability in each of the last four. Furthermore, its sales performance remains mixed. However, it appears to have a sound strategy through which to turn its performance around and with such impressive forecasts, it seems to be on track to achieve its medium-term goals.

So, while a 50% overnight gain is always welcome, it could be the case that Daetwyler is obtaining a high quality company at a relatively appealing price.

The post Premier Farnell plc surges 50% on 165p-per-share Daetwyler deal appeared first on The Twelfth Magpie.

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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.