$MTC.L – an object lesson on never buying bid targets

MTC (Mothercare) sell baby products. In after-hours on Friday, Desitnation Maternity announced is abandonment of a possible offer for MTC. Predictably, the shares are down – around 4% at the time of writing – although they had been down over 10% at one point.

It has been my observation that the majority of bid situations fail, and that you are well to take some money off the table. The only time I’d consider a bid to have a real possibility if there’s some special reason to suppose it will succeed, like certain shareholders giving irrevocable undertakings to accept the bid.

AZN (AstraZeneca) is another recent example. A good strategy would have been to sit on the fence for awhile after the bid was announced, wait and see if a better offer is made, and then dump the share if you think it is fully valued. You’ll be holding for a month, tops.

KENZ (KENZ) is fairly recent, too, only this time the bid looks like a done deal. On this occasion, though, the directors unanimously recommended the deal, and irrevocable undertakings were given. It wouldn’t have hurt to sell your shares anyway, as, once it was announced, the share price bobbed around in a very narrow range due to the arb guys. You’re fighting over pennies at that stage.

Defence company CHG (Chemring) is another example of a failed bid. I once bought into online poker company 888 (888) as it was in the process of a bid. Bad move! The bidder, William Hill, walked away.

Years ago HMV was involved in a bid, which was subsequently abandoned. HMV shares eventually went to 0, and investors must be kicking themselves that the bid did not succeed. There are, of course, many many other examples I can site, but you get the point. HMV and MTC seem worringly similar in terms of their business model and perilous finance situation.

I had written about MTC back in January 2014 (http://wp.me/p2eZvw-vJ) when the share price was around 420p. It is now 247p. I commented at the time: “the kindest thing I can say is that the market is pricing it “about right””, and expressed the concern that “I’m being generous here”. In light of the subsequent share price action: no kidding.

I was being too generous about the company, chiefly because I knew of an investor that I respect highly was bullish on the stock. That introduced a bias that, with hindsight, I would have been better off without.

I will repeat what I said back in January, because it still seems relevant now: “I think management are going to need to pull a rabbit out of the hat. Possible, but tricky. I don’t own any shares, and think it’s a risky bet to go long here.”

If anything, I judge MTC to be further out on a limb. Their prelims, issued in May, show total sales down 2.6%, and net debt up. The sales are a bit schizoid, though, as the international sales are up, but are being dragged down by UK sales.

In July, Matt
Smith resigned as Chief Financial Officer and Executive Director. Mark Newton-Jones was appointed Chief Executive Office, having previously been its interim CEO. He joined MTC in March 2014. He does have turnaround experience. He has not made any significant share purchases.

Analysts have pencilled in some robust gains for the group for 2015 and 2016. I have severe doubts about that!

In my view, it’s not impossible that MTC will turn itself around, but it is incredibly risky, and I’d rather be out than in.

242p

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About mcturra2000

Computer programmer living in Scotland.
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