With many UK stocks continuing to look cheap, the vultures have started to circle. Yesterday (19 February), US investment firm Elliott Advisors made an offer to acquire electronics retailer Currys (LSE:CURY). The share price has responded by rising 39%.
This was a cash offer for the entire firm at 62p per share, or £700m. The FTSE 250 firm rejected this, saying it “significantly undervalued the company and its future prospects“.
For context, the Currys share price five years ago was 129p. Therefore, the 62p per share offer valued the firm at less than half that.
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A potential bidding war could now ensue as Chinese e-commerce giant JD.com is also reportedly weighing up an offer.
Withering on the vine
Despite the rather distasteful imagery, vultures are as necessary in the stock market as they are in nature.
They provide a way for shareholders to unlock some sort of value from a distressed or undervalued business. And as we’re seeing with Currys, it can often draw a competitive bidding war.
Again, this is preferable to a company quietly withering away on the vine of the stock market.
Competition
JD.com is often called the Amazon of China, which I find a little bit ironic. After all, it’s Amazon that has long put competitive pressure on the UK electronics firm as it has gone from Dixons Retail to Dixons Carphone and now just Currys.
According to the BBC, one former Currys employee said customers would visit stores to see if the prices matched Amazon’s. If not, they’d simply turn on their phones and order from the US e-commerce giant.
So the issue here has been a lack of pricing power due to intense online competition, resulting in razor-thin profit margins. Covid also didn’t help matters.
A potential turnaround
Despite this, Currys still generated almost £10bn in annual revenue in 2023. And last month, management said its adjusted pre-tax profit for FY 2024 (which ends in April) was to be “ahead of consensus expectations” at £105m-£115m.
Moreover, following the disposal of its Greek business this year, the company is set to significantly improve its debt position. Pair this with a ridiculously low price-to-sales multiple of 0.08, and it’s easy to see why Currys is attracting interest.
One risk for investors buying here, though, would be a rejection of further offers. This would probably result in the share price falling back.
More potential takeover targets
Given how undervalued the UK stock market is today, I expect more takeover bids, especially in the retail sector.
So, what firms could be next? Well, fortunately, we have a ready-made list of potential candidates here.
That’s because FTSE 100 retail giant Frasers Group, already a sizeable shareholder in Currys, has been snapping up cheap shares in this space for months.
Here is a list of brands in which it has built up major stakes:
- ASOS
- boohoo
- AO World
- N Brown
- Mulberry
These group of stocks have fallen between 56% and 87% over the last five years. So it wouldn’t surprise me if any of these also become takeover targets at some point this year.
Personally, though, I wouldn’t take a punt on any of these stocks. I’d rather get the popcorn out and watch any bidding wars unfold without risking my money.
