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Here’s why the Stagecoach share price is soaring

travel company bus greets tourists at the airport to take to the hotel

Shares in Stagecoach (LSE: SGC) have soared today, adding more than 9% at the time of writing this article. There is a simple reason for this surge in the Stagecoach share price. Below I explain the dramatic increase — and whether I think it is worth adding more of the shares to my portfolio at the moment.

Merger announced

Back in September, the bus company and its rival, National Express (LSE: NEX), announced they were in talks about a possible merger. Today the company revealed to the market the combination is now a firm plan.

In the announcement, the terms of the deal were set out. Stagecoach shareholders are in line to receive 0.36 of a share in the combined company for every Stagecoach share they own. That will leave them owning a quarter of the new company. Three-quarters will be owned by existing National Express shareholders. If things go according to plan, the deal will take effect around the end of next year. So, fittingly for a bus company, there is still a lot of road ahead for Stagecoach shareholders.

Why the Stagecoach share price jumped

When a takeover is announced, often the share price of the company being acquired moves on the market roughly to the proposed purchase price. Although today’s deal is being pitched as a merger, in effect it looks like a takeover of Stagecoach by National Express.

That is why Stagecoach shares have risen today. They have risen 8% since I wrote last week of the value I saw in Stagecoach for my portfolio. They are up 9% over the past year. National Express shares also rose today, although only around 2%. They stand around 1% below their price a year ago.

Further share price moves are possible

I reckon Stagecoach is an attractive company. The purchase price of £468m is well within the reach of rival bidders such as private equity groups. They may be attracted by Stagecoach’s strong brand and a business model which in many markets involves little competition. If another bidder makes an offer for Stagecoach, the share price could appreciate further.

I also think the deal could yet fall flat. There is a risk of competition concerns overriding the commercial logic for the combination. It also needs to be approved by shareholders. That can never be taken for granted. If the deal falls through, the Stagecoach share price could fall again. Meanwhile, I expect the Stagecoach share price to move broadly in step with the National Express share price. So, for example, if the National Express share price moves up, I expect the same will happen for Stagecoach. That is because each share will basically be valued by the market based on its possible future worth as just over a third of a National Express share.

My next move

I wouldn’t add more shares to my portfolio simply in expectation of rival bids. That’s speculation, not investment.

But I don’t plan to sell my Stagecoach shares just yet. I see it as a well-run company, so will be happy to hold the shares for now.

The post Here’s why the Stagecoach share price is soaring appeared first on The Motley Fool UK.

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Christopher Ruane owns shares in Stagecoach. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.