Penny stocks can be highly attractive takeover targets, as their tiny market capitalisations make them relatively cheap to acquire.

In the UK today, there are plenty of quality small-cap shares with qualities that could make them attractive to a larger suitor, including:

• Niche market dominance
• Valuable intellectual property (IP)
• High growth trajectory
• Huge cost reduction potential
• Rock-bottom valuations

For investors, identifying and buying potential takeover candidates can end up being lucrative business, thanks to the juicy takeover premiums that buyers frequently offer shareholders to seal the deal. Premiums of up to 30% are not uncommon, leading to substantial cash windfalls for shareholders.

But here’s the thing. Even if a takeover bid never materialises, you may still own a high-quality growth stock that delivers stunning returns over time.

Want to know which penny stocks might be next takeover stars? Here are my two top targets..

A sparkling penny stock

Chapel Down (LSE:CDGP) is a leading producer of English sparkling wine, with strong brand equity and valuable agricultural assets. It owns roughly 10% of the country’s total vineyard acreage, and is official partner to elite sporting and cultural events including Royal Ascot and the Boat Race.

This penny stock explored a potential sale in 2024, but called it off and decided to maintain a UK stock market listing instead. It might be a matter of time before another suitor comes calling as international sales take off (up 66% in the first half) and its premiumisation strategy continues.

The company has targeted 3m bottles of fizz by 2035, equivalent to 1% of the champagne market’s total global volume.

Chapel Down might also get attention as vine-growing conditions in Britain improve due to climate change. Buyers will need to remember, though, that poor harvests are a threat that might leave a bitter aftertaste.

A top trust

Real estate investment trusts (REITs) are hot property right now, no pun intended. In one recent deal with LondonMetric, penny stock Schroder Real Estate Investment Trust (LSE:SREI) acquired commercial property owner Picton. I think SREI (as it’s commonly known) could itself become a takeover target soon.

As with other property shares, the trust has fallen sharply in recent months. Fears over higher interest rates mean the REIT’s shares are at a 30% discount to its net asset values. That’s bargain territory in my view, given the trust’s quality portfolio of 32 retail, office, and industrial assets.

If it remains this cheap after six months, I think SREI could attract a bid itself from LondonMetric. Why? Not only will the trust’s larger partner have cleared the cooling-off period under the takeover code. It will also have seen up close how Picton’s former offices and retail warehouses have performed under SREI’s stewardship.

Importantly, LondonMetric already holds a not-inconsiderable stake (11.1%) in SREI. It first opened a position last October, and given its appetite for acquisitions, I think a full takeover of the penny stock is possible.

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Royston Wild does not hold any positions in the companies mentioned.