UK firms have been getting snapped up at a rate of knots recently. In the FTSE 250, we’ve seen Spirent Communications, the telecoms testing company, and cybersecurity firm Darktrace agree to be acquired.
Currys and Direct Line have also attracted suitors.
The reason, of course, is that many UK stocks are undervalued. And while the FTSE 250 has risen nearly 14% in six months, I don’t reckon the acquisition binge is over just yet.
Falling out of fashion
One possible takeover candidate that stands out to me is Dr Martens (LSE: DOCS). The stock’s plunged 52% in the last 12 months and is down around 82% since going public in January 2021.
The bootmaker has encountered an almost perfect storm over the past couple of years. First, consumer spending has been under pressure due to high inflation, which has also increased the firm’s costs of materials and labour.
Sales have weakened in it largest market, the US, where it has also suffered problems at its new Los Angeles warehouse.
In its most recent quarter, revenue fell 18% year on year to £273m (at constant currency).
This slowdown caused management to issue a profit warning, its fifth in three years. This will have severely dented investor confidence in its guidance and prospects.
Finally, the CEO’s stepping down after leading the business since 2018. He will be succeeded by the company’s chief brand officer before March 2025 (the end of its current financial year). This has created further uncertainty.
A takeover looks possible
Despite all this, Dr Martens still expects to post full-year profits. Those chunky boots may not be flying off the shelves right now, but when they do, they sell for a premium.
These are quality products and the brand’s genuinely iconic.
Therefore, I don’t think interested suitors will be hard to find. Especially when the market-cap has fallen from £3.7bn in 2021 to just £752m today.
The stock’s price-to-sales (P/S) ratio is now just 0.78, which is pretty low.
Meanwhile, according to Reuters, one of Dr Martens’ shareholders has written to the board saying: “Maintaining Dr Martens as an independent publicly traded company is likely no longer in the best interests of shareholders”.
Of course, we don’t know how the board or Permira (the firm’s largest shareholder) see things.
Left holding the bag
To be honest, I see a whole load of fashion brands and retailers as possible takeover targets. Burberry, ASOS and boohoo spring to mind. There are other prime candidates too.
One strategy could be to go round buying all the stocks I think look undervalued and could be acquired. And that might include Dr Martens.
Then I could sit back and pour myself a drink while I wait for those mighty share price rises that often happen when takeover bids emerge.
The risk with this though is that the juicy premium I hope for doesn’t materialise. I may pay more for the shares than the actual acquisition price, meaning I’ll make a loss when the deal goes through.
I’d be left holding the bag, as it were.
So I won’t be buying the shares, despite the turnaround and acquisition potential. I’ll stick to investing in stocks where the outlook seems more clearer to me.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc. 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.
