Fevertree Drinks (AIM:FEVR), DFS Furniture PLC (LSE:DFS) and Wickes Group PLC (LSE:WIX) are the most likely takeover candidates among consumer-facing FTSE 250 and other UK mid-caps.
This is according to a Berenberg note assessing which companies are likely to make the most attractive acquisition targets, which considered factors such as cash generation, balance sheet position, valuation, shareholder structure and “easy win” opportunities.
While the consumer sector faces well-publicised risks stemming from high inflation and subdued consumer confidence, the analysts noted that involvement in M&A, or just rumours and speculation, have been a “key source of outperformance” in the wider space in recent months.
Fevertree is seen as an attractive target for three reasons: a market-leading position in a growing market, synergy opportunities available from scaling it up and making internal efficiencies, and its £131mln of net cash.
As market leader in the UK sofa market with a 35% share, DFS’s current share price reflects short-term concerns about consumer confidence, which is a key driver of the sofa market but the analysts believe “the medium-term story remains attractive, particularly given the growth angles arising from the Sofology store roll-out and adjacent category expansion” and a p/e ratio of just 5x and 6x for 2023 and 2024 earnings.
For Wickes, the third largest home improvement retailer in the UK, the share price is seen as factoring in a demand slowdown in the home improvement sector, though the analysts believe Wickes’s demand “will be more insulated given circa 66% of sales are to local trade and DIFM [do it for me] customers, where we expect growth to be more resilient than retail DIY demand”. The shares trade on a 7.3 P/E versus peer Kingfisher on 8.5 times.
Berenberg also pointed to companies believed to be “most likely to undertake ‘needle-moving’ acquisitions in the foreseeable future”.
These were Hollywood Bowl Group PLC (LSE:BOWL), where there is potential to undertake an acquisition in order to expand internationally, and AG Barr PLC (LSE:BAG), which has bolstered its portfolio by M&A over the years, “and we believe this may well continue”.
Looking at the other side of the coin, the broker also highlighted companies that could or should create shareholder value through disposing of certain divisions or regions, of which the UK name was National Express Group PLC (LSE:NEX).