What: Shares of building product company Nortek Inc. (NASDAQ:NTK) popped 40% in morning trading on Wednesday after management agreed to a buyout offer.
So what: Melrose Industries PLC has agreed to buy Nortek for $2.8 billion, including debt, or $86 per share in cash to shareholders. Melrose has created a subsidiary called Nevada Corp. that will technically merge with Nortek and then become a wholly owned subsidiary of the U.K.-based company.
The premium is big for today, but it's also an 80.4% premium based on the volume weighted average price over the past six months. Melrose is a turnaround company that has already identified supply chain and IT improvements it can make at Nortek, which is why it's willing to pay the premium.
Now what: Interestingly, shares have already zoomed higher than the offer price, trading at $87.33 per share as of 11:40 a.m. EDT. That implies that investors think a better offer from Melrose is coming.
While a higher offer could be in the works, I would take some profits today given the big premium Melrose is offering. It could back out of a deal or it could close at the current offer; both options present downsides for investors. Continuing to hold shares is risky, as a higher offer may not be in the cards with 68.7% of shareholders already planning to tender shares in the current offer.
Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.