The Hotel Chocolat deal reveals just how cheap UK stocks are

Mars just bought Hotel Chocolat for nearly three times its market value. How many more bargain basement UK stocks are out there?

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British chocolate manufacturer Hotel Chocolat was sold to Mars last week. My initial reaction to the sale was one of disappointment. It’s another American firm taking advantage of cheap UK stocks. Will the quality go down the pan like Cadbury’s not so long ago?

But amid my cynicism, the cost of the deal stood out to me. Mars paid £534m, a huge premium on the market price of the shares. It’s nearly three times the value from the stock’s last trading day. The US firm paid over the odds and then some.  

The outrageous price tag tells a story all by itself. It’s no secret that UK shares look cheap at the moment, but this deal might be a sign of many more cut-price bargains that investors could take advantage of. Let’s examine the buyout then.

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More cocoa, less sugar

Hotel Chocolat is perhaps not a household name so I’ll start with some basic details. The company began in 1993 selling ‘premium’ chocolate in the mould of Thorntons. Like Thorntons, it sold its products from its own high street shops and grew to around 130 stores.

The firm targets the top of the market, positioning itself away from cheap chocolate bars you might find in a supermarket. Its “more cocoa, less sugar” slogan shows what to expect from its products and it’s nice to see that 95% of the chocolate is produced from a factory in Cambridgeshire. 

Hotel Chocolat’s ‘luxury chocolate’ billing is perhaps part of the appeal to Mars. Snickers, Milky Way, and Twix are hardly premium brands, so it makes sense the US firm would want more exposure to the higher end of the market. 

What makes less sense is how much Mars paid. Hotel Chocolat shares were changing hands for 139p before Mars made an offer with a notional share price of 375p. That’s a 169% markup. And yet, the US conglomerate still saw plenty of value. 

So what does this mean for me? The evidence that UK shares are cheap continues to grow, and this is one more piece to toss onto the pile. I can’t buy the shares in Hotel Chocolate anymore, but I can search for other British bargains. 

Hiding in plan sight

Hotel Chocolat was a small company, AIM-listed, and with a market value of less than £200m before Mars came along. While the FTSE 100 is often called ‘cheap’, perhaps it’s worth looking for cut-price stocks in the smaller firms on the London Stock Exchange

All in all, I won’t be making any drastic moves. I will continue to search for and invest in undervalued companies whether British or abroad. However, this Hotel Chocolat deal does give me pause for thought. Perhaps the real bargains are hiding on the smaller end of the stock market.  

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John Fieldsend 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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