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The Navitas share price charged 13% higher on Tuesday – but is it a buy?

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The Navitas Limited (ASX: NVT) share price shot up nearly 13% to $5.53 on Tuesday on the back of an increased takeover offer from BGH at $5.825 per share, a premium of 29.5 cents on the closing price.

An unsolicited takeover offer from AustralianSuper and BGH Capital in October was a welcome relief for investors in the Australian education provider which had experienced a horror 20% decline up until the offer.

The latest offer has been unanimously recommended by the company’s directors. While investors may be thinking that Navitas is a clear buy at $5.53, I’ve picked out a couple of reasons why I think only fools would jump into the stock without considering their options.

The deal can always fall through

Large takeovers don’t just catch the eye of savvy investors, but also the eye of regulators. The private equity-funded buyout of a Navitas, a large ASX-listed entity with a current market cap of $1.98 billion, is going to need to jump through the familiar regulatory hoops such as ACCC and Foreign Investment Review Board (FIRB). Whilst there is currently no reason to suggest the deal would be scuppered by either of these, investors would be wise to remember that these sorts of deals can always fall through late in the piece. If that were the case, speculators would be left with a company that is still down 1.47% year-on-year and not much prospect of salvaging value.

I think there’s a better alternative

For all the hype surrounding Navitas and the ongoing saga with BGH Capital, fellow Australian education group G8 Education Ltd (ASX: GEM) remains an attractive buy in my opinion. The current $2.74 share price is up 9% since July 2018 and its $1.28 billion market cap is also comparable to that of Navitas. Whilst it has hardly been smooth sailing for G8 of late either, a compelling relative value argument can be made with a forward P/E ratio of 13.6 versus 22.5 for Navitas. G8 also boasts an impressive 9.4% dividend yield, higher than the 4.31% of Navitas, on top of the higher capital growth in the last 6 months.

Foolish takeaway

Whilst the $5.825 price proposed by BGH Capital for Navitas in Tuesday ’s recommended takeover offer presents an attractive premium for investors, I don’t see Navitas as a buy at $5.30 per share. There is a stronger case for G8 Education on a relative value basis.

However, if you’re not one for the education sector then Healthscope Ltd (ASX: HSO) could be worth a look. The Australian health care company is up over 11% since the start of last year and is similarly a takeover target for BGH Capital and AustralianSuper, which could see a tasty premium offered following the likely Navitas deal.

Where to invest $1,000 right now

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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. 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 Scott Phillips.

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