Shares in chocolatier Thorntons (LSE: THT) rocketed 42% higher to 144p when markets opened this morning.
The sharp rise was triggered by the news that Ferrero International SA has made a 145p per share cash offer for Thorntons.
Ferrero, whose brands include Kinder, Ferrero Rocher, Nutella and Tic-Tac, said that it had already purchased shares from a number of major Thorntons shareholders, including three directors.
In total, Ferrero says it already owns 30% of Thorntons shares and has received commitments to sell from shareholders representing another 4.46% of Thorntons shares. This gives Ferrero an effective stake of 34.46%.
As a result, the success of this offer seems almost certain. Ferrero only needs to secure a further 16% of Thorntons shares in order to take control of the firm, by controlling more than 50% of voting rights.
Is this a good deal?
Today’s cash offer puts a value of £111.9m on Thorntons, which was trading with a market capitalisation of £70m on Friday.
The 145p per share offer price equates to a 42.9% premium over Friday’s closing price and effectively values Thorntons’ shares on a 2015 forecast P/E of 23, and a 2016 forecast P/E of 16.
This seems fairly generous to me. Since 2009, Thorntons’ operating margin has averaged just 2.5% and its sales have only risen by an average of 0.8% per year. Operating profit has fallen by an average of 2.4% per year.
The current year has been disappointing, too. The firm’s third-quarter trading update showed a 7.6% fall in sales for the first nine months of the current financial year. Earnings per share are expected to fall by 33% this year and to remain below 2014 levels in 2016.
One particular problem has been that Thorntons has been a casualty of the current changes taking place in the supermarket sector. In its third-quarter trading update, Thorntons reported a massive 6.1% fall in UK commercial (wholesale) sales due to a reduction in order from one major customer.
Thorntons’ shareholders haven’t been rewarded for their patience, either. Dividends are a distant memory, with the last payout having taken place in 2011. At the same time, debt has risen sharply. Interest payments account for nearly a quarter of operating profit during the first half of the current year.
Should you sell today?
As I write, Thorntons’ shares are trading at 144.3p, almost exactly matching the Ferrero cash offer price of 145p.
Ferrero could be buying Thorntons shares in the market today, and I expect that it will have the 50.1% majority it needs to take control of the firm very soon.
If I was a Thorntons shareholder, I would sell my shares into the market immediately, as — apart from the dealing cost — there is no extra profit to be made by waiting for the offer to take effect.
By freeing up cash today, you can focus on finding new investment opportunities.