Severn Trent, bid fails, so is it now cheap?

One of the interesting things about following a bid story is what happens in the immediate aftermath when the bid is turned down and the potential buyers withdraw their offer and walk away. 

The short back-and-forth battle between Severn Trent and LongRiver Partners has come to an abrupt end, with the consortium announcing the withdrawal of its bidding interest for the water group late on Tuesday night.

The result was a sharp drop in Severn Trent's share price on Wednesday morning, down as much as 8.0% early on.

The stock surged to multi-year highs last month after the consortium - comprising Canadian investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme Limited - first announced its intention to take over the company, the latest UK utility group to attract the attention of foreign investors.

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The bid had been increased to 2200p a share which at the current price of around 1760p means that it is now some way off what the bidders were prepared to pay, and even further away from what Severn Trent themselves seemed to think was fair value. Difficult to say what that figure is, but it looks like it must have been a number that was high enough to make the bidders walk.

However, is the company now worth around 450p less than that bid price? Leaving aside looking at the fundamentals, it is always interesting to see how the market gets hyped when there is a chance of a bid, price gets pushed up to what is thought to be as close to a sale value as possible, often higher, which makes you wonder why it was priced lower in the first place. Euphoria of the bid plays its part, bandwagon jumpers get in hoping for a quick profit, but if someone was prepared to pay 2200p now for Severn Trent does that mean it is a bargain at around 1750?

Things aren't as simple as that as quite often the bidding company over values and pays too much. A few years back, a private bidder was prepared to offer over 200p a share for HMV, a company that in stock market terms went bust and is now privately held, the recent buyer getting it and all its potential future problems on the cheap. Severn Trent isn't HMV. As a utility stock it clearly has a premium value to longer term investors.

Next week the company goes ex-dividend, so anyone buying before the ex-div date will pick up 45.5p a share. By then, given the failed bid and the current state of the markets in general, the share could fall even further. Therein lies the problem, at least in the short term Severn Trent is in a down trend and anyone buying in for the dividend may well see further falls until the dust settles and market sentiment decides it's looking cheap again and their must be other potential bidders out there. One might assume that at some stage in the future, further bids, not necessarily from the same consortium, are likely to be made in what is an attractive sector for takeovers and you have to wonder if 2200p is now the minimum benchmark for anyone interested in Severn Trent.