Should Asos Acquire Burberry? This Analyst Thinks So

The Asos (LSE: ASOS) share price has languished in the past few months. The stock ended the week at 4,012p, which was about 33% below the year-to-date high. On the other hand, the Burberry share price has bounced back by about 13% above the lowest level in July. 

Should Asos buy Burberry?

Asos is a leading fashion house in the UK. The company operates a series of high street stores and its several websites and applications. The Asos share price downward trend accelerated after the company published relatively weak earnings. It also warned about the rising costs as shipping and raw materials prices rose. As a result, it published weak guidance.

Meanwhile, Burberry reported relatively strong results. The company sales rose by 90% to 479 million pounds. The company managed to bring its revenue to pre-pandemic levels even as the CEO announced the decision to exit.

Now, with more American companies snapping some UK companies, some analysts believe that Burberry could be in play. Some of the top UK companies that have been acquired recently are Morrisons, St. Modwen, Ultra Electronics, Meggitt, and Asda. Most of these firms have been acquired by moneyed American firms.

In an opinion during the weekend, Matthew Lynn suggested that some British companies should consider buying some of the UK companies. His suggestions were that Vodafone should consider acquiring BT while Barclays should consider buying NatWest. He also suggested that Asos buying Burberry would be a good idea. 

For one, the acquisition would give Asos exposure to the fast-growing luxury business. It would also give it access to the growing Asian business.

Would this deal work? Asos has a market capitalization of more than 4 billion pounds and annual revenue of more than 3.2 billion pounds. It has a profit before tax of more than 142.1 million and a PE ratio of 38.2 according to data by Hargreaves Lansdown.

Burberry, on the other hand, has a market cap of more than 8.77 billion pounds and annual revenue of more than 2.3 billion pounds. It has a profit before tax of more than 490 million pounds. Therefore, it is unlikely that Asos will acquire Burberry because the latter is substantially bigger than Asos. What could happen is that the two could do a merger of equals.

Asos share price forecast

The four-hour chart shows that the Asos share price has been under intense pressure in the past few months. Along the way, it has formed a bearish flag pattern that is shown in black. It has also moved below the 25-day and 50-day moving averages (MA).

Therefore, because of the bearish flag, there is a possibility that the stock will break out lower below 4,000p. On the flip side, a move above the resistance at 4,500p will invalidate the bearish view.