Is Sepura plc a buy on takeover speculation?

It's fair to say that it has been a tough year to hold shares in Sepura(LSE: SEPU). After reaching an all-time high of 196p at the end of March, the shares have lurched lower for the past six months as management has issued wave after wave of bad news and poor trading figures. Last week the shares closed just under 14.7p, a full 93% below their all-time high.

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It now seems as if Sepura's story and spectacular fall from grace is about to come to an end. Yesterday management published a news release informing shareholders that it's in preliminary talks with Hytera Communications Corporation Limited regarding a possible offer for the entire issued and to be issued share capital of the company. The press release went on to say Hytera has confirmed to the board of Sepura that any offer if made, is likely to be solely in cash. However, as of yet, there can be no certainty that any offer will be made.

Hytera is required to make a formal offer for the company by 17:00 on 2 December or walk away.

Take the money and run

A takeover may be the best option for Sepura and the company's investors. After the setbacks of the past few months, City analysts aren't predicting anything spectacular from the enterprise any time soon. The City has pencilled-in earnings per share of 0.09p for the year ending 31 March 2017, a fall of 98% from last year's figure. For the year to 31 March 2018, analysts are forecasting earnings per share of 2.8p, which is a drastic year-on-year improvement but still far below the 7.3p per share reported at the company's peak.

Lower earnings expectations aren't the only problems Sepura faces. In a trading update issued on September 14 the company stated that while it had sufficient liquidity for its forecast needs, revised revenue expectations may require it to "discuss with its lenders a possible waiver of certain of its covenants from March 2017." So, there's also the risk that the company may find itself struggling to keep the lights on if trading doesn't improve significantly during the next 12 months.

Time to buy?

Generally speaking, you should never buy a stock in the hopes that the company will be acquired at some point in the future, unless an offer has already been made. Nine times out of 10 an offer will never emerge and the trade will cost you money.

With Sepura it's no different. It's clear that it's struggling and the company faces an uncertain future. Therefore, if no deal emerges, the company's shareholders could be left holding the baby. If there's no progress on debt reduction, a rights issue may be on the cards or even bankruptcy, neither of which is a desirable outcome for investors.

So overall, it doesn't look as if Sepura is a buy on takeover speculation right now.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.