Imagination Technologies could sell for much more than this

Eleven weeks after its worst day, Imagination Technologies has officially hoisted the For Sale sign. It's already negotiating with potential bidders, and talk is the company will sell for a lot more than is reflected in the current share price.

Of course, the business is now without its biggest customer – Apple - after the iPhone maker pulled the plug on its deal with the UK tech star in April, triggering a spectacular 70% plunge in Imagination's share price.

Apple has decided to develop its own technology, stripping Imagination of license fees and royalties worth £60.7 million – 50% of total group revenue – in the year ended 30 April 2016. It was expected to be £65 million this year.

Imagination, which made the graphics processing units (GPUs) used for iPhones, iPads and iPods for several years, is still in dispute with Apple.

"Over the last few weeks [Imagination Technologies] has received interest from a number of parties for a potential acquisition of the whole group," it explained Thursday. "The board…is engaged in preliminary discussions with potential bidders."

Imagination has already begun offloading the MIPS and Ensigma operations, and is "progressing well". Indicative proposals have been received for both.

After slumping from 268p to an eight-year low of 76p, Imagination shares have been working their way higher and yesterday closed at 123p.

They're currently up 16% Thursday at 143p, but a future buyer will have to pay much more than this, argues Janardan Menon, an analyst at Liberum Securities.

"We upgrade the stock to a 'buy' from a 'hold' recommendation, raising our price target from 95p to 193p," he writes, arguing that the announcement is "very positive" for the whole group.

"We believe there are likely to be a number of potential buyers for the group including Intel, CEVA, Mediatek, Qualcomm, Apple and various entities from China.

"The final selling price depends on multiple factors including the number of potential buyers, but we see a range of valuations from 153p to 233p. Our new target price represents the average of the range."

That price reflects a low-end valuation of five times enterprise value/sales, in line with the historical trading range before the Apple bombshell. The top-end target is in-line with that of peers like CEVA's 10.9 times. ARM Holdings went for 20 times, but similar deals are more typically done at 9.1 times.

"In a sale process with multiple potential bidders the final price is rarely arrived through a rigorous valuation process, as the asset will have different imputed values for different buyers depending on their reasons for acquiring the company," says Menon.

"Given the long list of potential bidders for Imagination, we expect this to be an interesting process."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.