FTSE 250 Gamma Communications (GAMA) jumped more than 14% on Wednesday after the company confirmed it is in early-stage discussions with potential suitors over a possible takeover.
The UK telco equipment designer said late on Tuesday it was in preliminary talks with several interested parties to assess whether a proposal could deliver greater value to shareholders than remaining independent.
| Gamma Communications (GAMA) | Price: 835 (+14%) | Market cap: £755.29m |
High class asset
It would be fascinating to be a fly on the wall during those conversations. Gamma had been a roaring success following its IPO in 2014 at 187p per share, driving consistent, high-quality double-digit growth as it emerged as an industry leading, very profitable and cash generative operator. In 2021, the stock hit a peak £23.35.
But the path has become far patchier since then and investor backing less reliable. Over the past six months the stock has halved to last night’s 732p, sending the PE into single-digit territory. On that basis, perhaps it was only a matter of time before the company attracted attention.
Gamma said that discussions remain at an early stage, but the announcement has triggered an ‘offer period’ under the Takeover Code, subjecting shareholders to additional disclosure requirements.
The Takeover Panel granted the company a waiver from naming the potential bidders unless they are identified in market speculation.
So, who might the buyers be? The simplest option would be a private equity investor. Taking Gamma private would allow the company an easier path to continue its M&A strategy, which is tough at current market multiples.
Buy and merge
A variation on the private equity theme would be to bash together Gamma and a decent sized UK PE-backed peer to unlock significant synergies/address buyer leverage issues. Here, potential deals would be to combine Gamma with wholesale peers, perhaps Giacom and/or PXC, or a large retail player such as Wavenet, says Megabuyte analyst Philip Carse.
Lurking in the wings is O2 Daisy, which enjoys the backing and lower cost of debt of majority shareholder Virgin Money O2, and which signed a strategic deal with Gamma a few months back.
M&A isn’t thought to be a priority for Daisy right now, given the current task of merging Daisy and VMO2’s B2B operation, but Daisy boss Matt Riley (who ran the company when it was itself listed in London a few years ago) may see Gamma as an opportunistic option given its current valuation.
Crucially, we’d expect significant sole searching at Gamma board level given the scope for valuation recovery from self-help actions. Analysts are already forecasting a return to stable growth over the next couple of years. Operating margins also have scope for improvement. They were 14% last year – about the mid-range of recent years – but have been close to 20% in the past.
Time will tell, but any Gamma departure would be another blow to London’s stock market and choice for UK retail investors.
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