Buy or Sell: Time to get out of cable maker Draka?

By Greg Roumeliotis

AMSTERDAM (BestGrowthStock) – Even though Draka (DRAK.AS: ) is sounding increasingly negative about Xinmao’s 1 billion euro takeover offer, shares in the Dutch cable maker have held up ahead of Monday’s update by the Chinese company on its offer.

Draka said on Friday it had concerns over Xinmao’s progress in securing financing and approvals for its bid. Draka shares are still trading some two euros above the offer level of Italy’s Prysmian (PRY.MI: ), but at 19.25 euros are well below the 20.5 euros per share valuation of Xinmao’s bid.

Xinmao has said bank financing for its bid is conditional on it reaching final agreement on a merger protocol with Draka. With the Dutch company sounding more skeptical by the day, this looks increasingly unlikely.

Here is how bulls and bears view the merger arbitrage situation that has sent the trading volumes in Draka’s shares to record highs.

BUY

The resilience of Draka’s shares has baffled many analysts and investors who see it as very likely that Draka’s management will not agree on a deal with Xinmao, scuppering its ability to secure financing for the deal.

But Draka’s share price is not driven just by opportunistic hedge funds. Some long investors see the bidding battle for Draka, triggered by a Nexans (NEXS.PA: ) offer in October, as unlocking Draka’s true value.

Draka trades at 14 times 12-month forward earnings, in between Prysmian, at 11 times, and Nexans, at 16.5 times, according to Thomson Reuters Starmine.

“Some people see this as a zero-sum game and it is not. Yes the stock is double what it was four months ago but it’s half what it was in the summer of 2007,” said fund manager at a Draka minority shareholder on condition of anonymity.

“It is possible that some kind of commercial agreement will be reached with Xinmao to provide cables in China. Or the shares hold up and Prysmian will have to sweeten its offer. It will not be the end if Xinmao drops its bid.”

SELL

According to the latest Thomson Reuters Starmine data, the mean price target among analysts for Draka’s shares is 16.55 euros, nearly three euros below the current level.

This suggests many believe Draka has pushed an M&A premium as high as it could. Although the three-way bid battle makes Draka look like the darling of the cable manufacturing industry, skeptics argue the stock has reached its limits.

“There is just a mismatch between risk and reward. It is more likely that Xinmao will walk and then you lose two euros per share, while it is unlikely that Xinmao will win, in which case you win a little more than one euros per share,” SNS Securities analyst Martijn den Driver said.

“Time is running out for people to cash out, they should take advantage of that opportunity,” he said.

(Editing by Sara Webb and Alexander Smith)

Buy or Sell: Time to get out of cable maker Draka?