Residential care home specialist CareTech (CTH:AIM) is in takeover talks with children’s services provider Cambian (CMBN) for a potential £600m merger, prompting a 32.8% rally in the latter to 196.7p.

CareTech has offered 220p per share or a full cash alternative of 200p in a deal valuing Cambian between £290m and £319m.

According to media reports, Cambian rejected a previous offer at £2.10 per share a few weeks ago.

The approach is potentially opportunistic as shares in Cambian were trading at a one-year low prior to the takeover approach.

It has also been a difficult year for CareTech as its shares have fallen 10% to 378p over this period.

RECENT STRATEGIC MOVES

CareTech in June said it had ‘a number of consolidation opportunities under consideration’.

Cambian classifies itself as one of the UK’s leading specialist education and behavioural health service providers.

Its current strategy involves improving the quality of its services and focusing on higher severity where it is also trying to lift fees.

CONSOLIDATING A FRAGMENTED MARKET

Liberum analyst Graham Doyle says the takeover would enhance CareTech’s Young People’s business and help consolidate a fragmented market.

He is optimistic CareTech can benefit from cost synergies if the deal goes ahead and some of Cambian’s sites would be better fit for the company, boosting occupancy rates and returns.

Doyle strikes a note of caution, flagging there is a risk to CareTech around the execution of investments to improve margins at its takeover target.

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Issue Date: 10 Jul 2018