Greencross Limited rejects takeover offer: Are the shares a buy?

Credit: Michael Gil

In response to a report from The Australian Financial Review this morning, Greencross Limited (ASX: GXL) has confirmed it will not pursue a takeover offer made by private equity firm TPG Capital.

The United States-based TPG Capital made a play for the pet retailer and veterinary group late in 2015, when it tried to take advantage of a low share price and the weak Australian dollar. It was soon reported that the New Zealand-based EBOS Group Ltd (ASX: EBO) was also interested in the company, after shares had fallen as low as $4.51, down from $9.90 in February 2015.

According to the AFR’s Street Talk, TPG made an indicative bid for Greencross in the days before Christmas, offering to pay $6.45 for all the shares in the company that it didn’t already own.

Greencross confirmed it had received an indicative bid from TPG as well as from other parties, but noted the offers were “highly conditional” while the price offered also “fundamentally undervalues Greencross”. Investors tend to agree with the shares currently changing hands for $6.84.

The company said: “The Greencross Board has high confidence in the future growth and performance of the group and considers there to be significant further organic and inorganic growth opportunities available to it as it pursues its strategy of offering an integrated pet care solution in the fast growing Australian pet sector.” 

Indeed, Greencross has grown strongly in recent years and could continue to do so over the coming periods. Not only is it expanding its store count to gain access to more Australian pet owners, it is also trying to integrate those stores to include vet services and grooming salons as well. In other words, it hopes more of its stores can become a one-stop-shop which has traditionally helped generate greater average customer spend.

Source: Greencross 2015 AGM

Source: Greencross 2015 AGM

Unfortunately, companies tend to go where there are long-term profits to be made, so growing competition is a key risk for the group. There’s also a risk that its store integration won’t be as successful in other locations as it has been so far, or that it could pay too much for new acquisitions.

At its current price however, Greencross could still be a reasonable investment idea for long-term investors. Further takeover offers are possible, but the growth potential itself could be enough to boost the shares in the long run.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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