Shares in E2V (LSE: E2V) have soared by almost 50% today after it became the subject of a bid approach by Teledyne Technologies. The offer is all-cash and vales the company at 275p per share. This represents a premium of around 48.2% to E2V’s closing price from Friday 9 December and a 53% premium to the volume-weighted average closing price since the company’s half-year report was issued on 7 November. While a near-50% gain may seem like good news, does the bid still undervalue the stock?
A done deal?
Teledyne believes that the two companies will prove to be a good fit. It feels that its strong track record of acquiring and successfully integrating businesses into its network mean that the acquisition would be a sound move. Furthermore, it considers that the deal would allow it to enhance its customer proposition and growth dynamics. As such, E2V’s directors are backing the deal and are encouraging all shareholders to vote in favour of the takeover. They represent around 1% of the company’s share capital.
In addition to the 275p per share in cash, investors in E2V will receive an interim dividend of 1.7p per share, which will be paid on 20 December. Given that this amounts to just 0.6% of the offer price however, it’s unlikely to make a significant impact on the decision-making process of whether to accept or reject the bid approach.
A bright future
Clearly, E2V has a bright future. Putting the bid to one side, it’s expected to increase its bottom line by 11% in the next financial year. This follows a strong recent history of growth, with the company’s bottom line increasing at an annualised rate of 5.6% during the last five years. Despite the progress made by the business, it has traded on a relatively low forward price-to-earnings (P/E) ratio of around 12 prior to today’s offer. However, it now has a forward P/E ratio of around 17.5, which indicates that the bid is a fair price to pay for the company, given its track record and future outlook.
As such, it seems likely that the deal will progress, especially since it represents the highest share price the company has seen since the credit crunch. This means that even holders of the stock for a number of years are now likely to be in profit, and so are more likely to be tempted by the promise of an all-cash offer.
Sector appeal
Of course, the industrial sector remains an attractive investment proposition. For example, Morgan Advanced (LSE: MGAM) is expected to grow its bottom line by 8% in the next financial year. This puts it on a forward P/E ratio of 13.3, which indicates that it has upward rerating potential. Morgan Advanced should also benefit from the continued weakness of sterling, which could boost profitability while also making its shares more attractive to a foreign buyer. And with it having a yield of 3.7% that’s covered 1.9 times by profit, it remains a sound income play for the long term.
