This struggling retailer may have just caught a lucky break

There’s nothing like fresh takeover rumours to trigger a bounce off record lows. High-end fashion label OrotonGroup Limited’s (ASX: ORL) share price jumped 3% to $1.03 in early trade even as the consumer discretionary sector tumbled into the red with the rest of the market following news that a major shareholder had sold its stake in OrotonGroup.

The outperformance of OrotonGroup stands in contrast to the S&P/ASX 200 (Index:^AXJO)(ASX:XJO), which is down more than 1% this morning. There should have been a bigger surge in the share price but takeover rumours have been swirling around OrotonGroup for a while as the company announced profit downgrades and the resignation of its former chief executive.

Market Heat Map

Source: NAB Trade

Takeover speculation got a second wind on news that UK-based fund manager Highclere International sold its entire 7% holding in the embattled retailer at $1 a share. While it isn’t clear who Highclere had sold its stake to, there are rumours that it was another ASX-listed peer that has snapped up the shares.

The Australian Financial Review believes the eager buyer is Gazal Corporation Limited (ASX: GZL). That’s certainly not a loopy idea given that Gazal supplies a number of high-end brands such as Calvin Klein, Pierre Cardin and Tommy Hilfiger.

Gazal also has operations in Hong Kong, which will no doubt have some synergies with OrotonGroup’s Asian expansion.

However, I am not sure if Gazal has a big enough war chest to do a complete takeover of OrotonGroup. While Gazal’s market cap of around $133 million is three times that of the target, it reported that it has less than $3 million in the back as of end of calendar 2016 and total debt of nearly $28 million.

If Gazal is indeed the buyer of Highclere’s stake, perhaps it is just interested in guaranteeing a place at the negotiation table if a takeover bid were to be lobbed. It’s a strategy taken out of retail doyen Solomon Lew’s playbook as he bought a stake in David Jones before it was sold to Woolworths and has done the same thing with department store operator Myer Holdings Ltd (ASX: MYR).

Could Solomon Lew’s Premier Investments Limited (ASX: PMV) throw its hat in the ring for OrotonGroup? It certainly won’t be out of the question given his track record and portfolio of fashion retail assets.

OrotonGroup isn’t the first straggler to attract suitors and neither will it be the last. As I mentioned in an article on Wednesday, I think we will see more action at the small to midcap end of the market.

Already, beaten down retailers like surf and sports apparel company Billabong International Limited (ASX: BBG) and women apparel retailer Specialty Fashion Group Ltd. (ASX: SFH) already have seen suitors circle in some shape or form.

Trying to pick winners from the bottom of the retail barrel is very difficult and risky. While I think some acquisitions will be consummated, many will not. The risk doesn’t seem worth the reward in my view as I think there are better places to hunt for value than among struggling consumer discretionary stocks.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia owns shares of Premier Investments Limited. 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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