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Takeover targets springing up in retail sector prompts investors to bargain hunt

The share price of Specialty Fashion Group Ltd. (ASX: SFH) has surged over 9% to 18 cents even in the face of significant losses across the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) this morning.

The embattled apparel retailer is bucking the trend after it confirmed that it had received a number of non-binding, indicative takeover offers for the group or for parts of its business.

Management had hung a “for sale” sign on the group when it declared at its annual general meeting last year that it was restructuring the group and looking at all options to “improve shareholder value”.

Speciality Fashion is in essence hoping for some “Sirtex magic”. Liver cancer treatment company Sirtex Medical Limited (ASX: SRX) received a $1.6 billion takeover offer, which represents a 49% premium over its last traded price, after falling from grace and as the old guards (i.e. CEO and Chairman) exited the business.

The retailer has been a long-time underperformer and its long-standing chief executive Gary Perlstein had also recently announced his departure.

It is interesting to note that one of the potential suitors for Speciality Fashion is Mr Perlstein, although investors shouldn’t get too excited just yet as a firm bid may be some ways off and it’s anyone’s guess what price bidders will be willing of cough up.

Specialty Fashion has also tried unsuccessfully to sell itself in the not too distant past.

Interest in the struggling retailer comes hot on the back of other potential corporate transactions at the smaller end of the market, which includes automotive services company AMA Group Ltd (ASX: AMA) – another consumer sector stock.

I am expecting more of such takeover rumblings in the retail industry as the sector looks ripe for the picking. The industry is under pressure and that means many will need to grow bigger in order to survive.

The beaten down valuations will also give better placed retailers, such as fellow apparel retailers Noni B Limited (ASX: NBL) and Premier Investments Limited (ASX: PMV), a lower cost and lower risk opportunity to grow their businesses.

Raising capital for value accretive transactions is also not an issue as investor risk appetite has come back with a vengeance and debt is still relatively cheap.

Other potential mergers in this sector that I have written about include Myer Holdings Ltd (ASX: MYR) and struggling department stores Target and Big W, which are owned by Wesfarmers Ltd (ASX: WES) and Woolworths Group Ltd (ASX: WOW), respectively.

But trying to pick the next takeover target is a dangerous game that retail investors shouldn’t engage in. There are better opportunities in the market and the experts at the Motley Fool have uncovered three that are well placed to make a big splash in 2018 and beyond.

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