US retailer eyes Mothercare

Poor old Mothercare (MTC) has been at the centre of a great deal of news in recent weeks. As well as ongoing debt issues and the lack of a chief executive, the mother and baby specialist is rumoured to be cutting 500 in-store staff and has become an acquisition target following a bid proposal from US retailer Destination Maternity.

Destination Maternity has offered to pay shareholders 230p in cash, as well as 70p in equity in a new US-listed company combining both businesses. This values Mothercare at £266m, a figure many analysts argue is too low. Doubts have also been raised as to whether the deal would lead to material cost savings or, indeed, a UK recovery. Therefore, it's perhaps not surprising that the board has rejected the offer.

Chairman Alan Parker said the bid didn't take into account the prospects for a UK recovery, adding that it lacked "strategic rationale" and came with major execution risks. Meanwhile, the staff cuts have come as Mothercare attempts to control rising store costs against falling sales, squeezed gross margins and a burdensome debt pile. Destination Maternity has been given until July 30 to announce a firm intention to make an offer for Mothercare.

John Stevenson at Peel Hunt says...

Hold. While some investors may welcome an exit opportunity, Destination Maternity offers no compelling solution for UK recovery nor any material synergies to leverage. Indeed, we see interim chief executive and turnaround specialist Mark Newton Jones as the more likely candidate to deliver a UK recovery. Still, shareholders will be keen for Mothercare to engage and are right to demand that Mothercare explains how it intends to deliver a better return. We are forecasting adjusted pre-tax profit of £13.9m for the current financial year, up from £9.5m in the 2014 year-end.

Mike Dennis at Cantor Fitzgerald says...

Sell. Mothercare's UK business model remains unprofitable and we continue to see downwards pressure on gross margins. It would also seem that the savings from closing stores are more limited than expected and non-store cost savings are a lot more limited. Management's recovery plan may also require more capital. As such, we doubt a deal with Destiny Maternity could fix the high UK store costs and very low sales densities. Not only would it create roughly £365m of goodwill, but it would probably require the closure of more high street stores, meaning a further loss of sales. We see significant downside risk for the shares this year and maintain our sell recommendation, with a target price of 114p.