Should you buy this takeover prospect after its 10% share price jump?

Investing in a takeover target can lead to nice profits, especially if there are competing bidders, but it can be risky too.

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I looked at Amigo Holdings (LSE: AMGO) a few weeks ago after its share price had suffered a big fall. But since that 27 January low, Amigo shares are up 50%.

Amigo had pioneered the guarantor loan business, which lent money to high-risk individuals provided they could find someone to cover it should they fail to repay. But the model hadn’t been attractive, and the company’s biggest shareholder, Richmond Group, decided to sell its 60.66% stake.

With a number of options open, the company has plumped for the option of putting itself up for sale, and Tuesday brought us a strategic review update.

Offers?

Amigo says it “has received indications of interest from several parties,” though it stresses that “there can be no certainty that an offer will be made, nor as to the terms on which any offer will be made.” Still, the presence of apparently interested parties has buoyed its prospects, and the shares gained 13% on Tuesday morning in response.

On forecasts for the year to March 2020, we’re looking at a P/E of just 3.5. I think there could be significantly more upside than downside.

Richmond Group will want to get the best price it can, and it has a lot of clout. And at least two parties appear interested, so we might see a bidding war.

I wouldn’t have bought Amigo shares myself because I don’t really like the business. And I wouldn’t invest for a possible buyout profit as that’s really just a gamble. But I do see potential for those who want to take the risk.

Back to growth?

It’s hard to think about loan companies without Provident Financial (LSE: PFG) coming to mind. Provident also caters to individuals with low credit scores, and charges high levels of interest. But questions about its practices, coupled with investigation by the Financial Conduct Authority (FCA), helped precipitate a share price crash.

Despite previously flying high, Provident shares slumped during the spring and summer of 2017, and then carried on drifting lower. From late April that year, the shares lost 85% of their value. But since August 2019, things have been looking better, and shareholders have enjoyed a 30% rise.

Solid quarter

Results for 2019 aren’t due until 27 February, but a Q4 update released in January looked reasonably positive. The firm says things are going as planned, and that its Vanquis Bank has “delivered results modestly above expectations.” The firm’s funding facilities have been improved too, via a facility with NatWest Markets to fund its Moneybarn business.

Speaking of Moneybarn, the FCA has hit the business with a £2.8m fine after deciding it hadn’t treated customers fairly. The firm itself has provided over £30m in redress too.

CEO Malcolm Le May said Provident expects to “report full-year results in line with market expectations,” suggesting the City’s P/E valuation of 10 is about right.

Provident could be out of the woods and set for a return to the earnings and dividend growth that analysts expect. And if that’s true, we could be looking at an attractive growth and income prospect here. It’s not for me, though, for ethical reasons.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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