Fast-fashion retailer Boohoo (LSE:BOO) has snapped up the Debenhams brand and website. Meanwhile, online trading group IG Group Holdings (LSE:IGG) is improving its derivatives offerings with the $1bn acquisition of US site Tastytrade. In light of this, would I buy either of these FTSE 250 stocks as long-term investments?
Boohoo acquires Debenhams
The Boohoo share price is rising in response to the news. I’ve always loved shopping at Debenhams, so as a customer I’m happy to still have the option. However, I think Boohoo shares are currently expensive. The UK retail sector has been hammered these past few years, first by Brexit, then Covid-19. Online sales are where the growth is at, but I think that’s already priced into Boohoo’s share price. It could be some time before the company sees sales growth to match its price-to-earnings ratio of 60.
For investors focussed on environmental, social and governance (ESG) investing, Boohoo has to clean up its act. The company faced an investigation into atrocious working conditions at suppliers’ factories in the UK last year.
I think Debenhams is a good fit for Boohoo and if managed correctly, it may well help strengthen the company in the future. However, Boohoo doesn’t offer a dividend and I’m not tempted to add Boohoo to my Stocks and Shares ISA at its current market price.
IG acquires Tastytrade
Tastytrade is a fast-growing online brokerage popular among retail investors. It specialises in the US futures and options market, which has taken on a life of its own in the past year. Tastytrade offers web-based options trading on individual equities, something IG customers in the UK have been requesting for some time.
IG has a stellar platform and the infrastructure in place that will help expand Tastytrade’s presence internationally. Options trading is more complicated than simply buying or selling stocks. When done with little care, it’s akin to gambling. But when carried out thoughtfully, it can reduce risk and offer the potential of sensational returns.
An expensive acquisition
IG shareholders were not overly enthusiastic in response to the acquisition, and the IG share price fell 10%. There are a couple of reasons for this. The options market has seen spectacular growth in the past year. However, there’s mounting speculation that the high-flying tech stocks are heading for a crash. If retail investors get badly burned, it will take the shine off the growing sector and it’s likely to face increased regulation.
Spread betting business IG Group is either shooting for the stars or letting history repeat itself with a questionable acquisition. IG acquired FXOnline in 2008, around the time of the financial crash. Presumably it foresaw a bargain opportunity to grow exponentially. Unfortunately, this didn’t work out as planned when increased regulatory challenges dented its profitability.
IG currently has a price-to-earnings ratio of 12, its dividend yield is 5%, and earnings per share are 65p. It will complete the IG acquisition with a combination of $300m in cash and by issuing 61m IG shares. This gives Tastytrade a valuation around 18 times its 2020 earnings before interest, tax, depreciation, and amortisation (EBITDA).
Despite the high price tag for Tastytrade and potential for regulatory scrutiny, I think this looks an exciting acquisition. I’m tempted to buy shares in IG as a long-term investment.