AGA Rangemaster Group (LSE: AGA) shares surged almost 20% higher when markets opened today, as news of an 185p per share offer for the cooker firm was made public.
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.
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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.
