Britain's FTSE Smallcap index could disappear as deals heat up, analyst says

By Anousha Sakoui

LONDON (Reuters) - Britain's FTSE Smallcap index could cease to exist by 2028, Peel Hunt head of research Charles Hall estimated in a note on Wednesday, if the pace of takeovers in London's stock market continues alongside a dearth of initial public offerings.

WHY IT IS IMPORTANT

Policymakers are trying to draw investors back to the UK stock market to help bolster the valuations of the country's companies. The evaporation of the index would cut off a source of funding for small firms, further threatening London's role as a global capital markets hub as a growing number of companies choose to list elsewhere.

CONTEXT

Hall described UK M&A as a "feeding frenzy", as buyers start to seize on the low valuations of London-listed companies. There was a marked acceleration in the number and value of bid activity in the first quarter versus the same period last year, according to Peel Hunt. Moreover, fund outflows have lasted for 34 consecutive months resulting in low valuations, making M&A attractive and shareholders more likely to agree to offers, Peel Hunt said.

KEY QUOTE

"There has been minimal IPO activity for the past two years," Hall said. "We believe this needs to be actively addressed as the FTSE Smallcap will cease to exist by 2028 at the current run-rate."

THE DETAILS The number of companies in the FTSE Smallcap index ex-investment trusts fell to 114 at the end of 2023 from 160 at the end of 2018. Of the 12 transactions announced in the first quarter of 2024, seven are in the FTSE 350, two in the FTSE Smallcap, and three on AIM. In the full year of 2023, 39 transactions were announced of which two were in the FTSE 350, 14 in the FTSE Smallcap, 19 on AIM and four others.

(Reporting by Anousha Sakoui; Editing by Emelia Sithole-Matarise)