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Vultures circle over UK firms where bargains are to be found

(Victoria Jones/ PA) (PA Archive)
(Victoria Jones/ PA) (PA Archive)

Fifteen UK stock market listed companies with a combined market value of nearly £170 billion could be vulnerable to takeover, analysis for the Evening Standard shows, in deals that would kick start the City and the moribund stock market.

City bankers says big money rivals, often in the US, are taking a close look at some of Britain’s best-known businesses, driven by the strength of the dollar against the pound, fresh certainty about interest rates that influence borrowing costs and low share values.

For months City experts have been complaining that London listed shares are unloved compared to similar firms in the US. With both economies now likely to avoid recession, bankers say clients are casting their eye over what could be some huge deals.

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At £100bn Unilever is the most striking possible target and could prove too big a mouthful for any consortium.

John Choong, markets analyst at InvestingReviews.co.uk said: "Considering the malaise of the UK stock market over the past couple of years and the fact that FTSE shares are now trading at their biggest discounts to fair value in over a decade, it’s no surprise to see talk about potential private equity takeovers pick up. The economic impact of Brexit, a strong USD vs GBP, and pervasive investor scepticism regarding Britain’s growth prospects have all resulted in flat trading volumes. Subsequently, this has left the share prices of many of these companies either flat or on a decline.”

“However, this doesn’t necessarily reflect the performance of these businesses. In fact, it’s been quite the opposite as shareholder yields for FTSE 100 constituents have only improved over the years as both dividends and share buybacks have increased. On that basis, PE firms could see plenty of potential from bagging some of these conglomerates at discounted valuations with the amount of free cash flow they have and can generate."

Yesterday figures from LSEG Deals Intelligence shows that dealmaking in the UK is at a 14-year low. Mergers and acquisitions with any UK involvement came in at $176.1bn (£144.7bn), down 45% on a sluggish 2022, according to LSEG Deals Intelligence.  The figures mark the worst period for deal makers since 2009, just after the global financial crash.

Derren Nathan, head of equity research, Hargreaves Lansdown, cites Asos and WH Smith as among his top targets. He says of Asos: “Despite some early progress in turning the ship around, the valuation of this trophy asset in online fashion retail remains beaten up. This could be a target for industry players looking gain a UK foothold.”

On WH Smith he adds: “This is one the private equity vultures have circled before.  The shares remain well below their pre-pandemic peak although on fundamentals, valuation still looks quite full. The potential to trim the physical estate may attract turnaround specialists.”

This week David Schwimmer, the CEO of the London Stock Exchange Group, dismissed criticism of the City as mere “clickbait”.

“I think that narrative is overplayed. London is a fantastic international financial centre,” he said, adding that the London Stock Exchange “is by far the leading European stock exchange.”

But there is no doubt the authorities are worried by the lack of activity and would welcome a splurge of deals, not least to save brokers and bankers struggling for years.

In a note by investment bank Peel Hunt, Charles Hall calls for a revitalisation of UK equity markets and speaks of the benefits of the market to companies, investors and the overall economy. Hall proposes a number of solutions, including adding an ISA allowance dedicated to small & mid-cap companies, extending the stamp duty exemption and IHT rules from AIM to listed smaller companies, and enabling retail investors to access research and participate in market activity.

He says: “The malaise in the UK equity market is deeply set and fundamental change is required to stimulate this vital part of the economy. Although the overall UK market needs attention, it is the small and midcap sector where revitalisation is urgently required.”

Analysis

Simon English, finance editor

For a long while the complaint was all about these swaggering foreigners coming over here, stealing all our big companies.

Morrisons – our Morrisons – fell to US private equity. Sky fell to Comcast. There were loads of others, Americans, Qataris and Scandinavians, grabbing our corporate heroes on the cheap.Lately, the complaint is that there isn’t enough of this action, even though London shares are, bankers in the capital say, plainly undervalued.

That might soon change. Deal-making has been moribund lately, for sure, but not just here.Uncertainty about interest rates and inflation have subdued activity across Europe. That could all be about to flip.

Floats are thin on the ground but which European stock exchange raised the most money for existing clients this year? London, by miles.

One point is that lots of our companies are doing much better than their share prices would suggest. Which in turn means the economy — which routinely defies official predictions of impending recession — is also at least holding its own.

When London Stock Exchange Group chief David Schwimmer complains that stories talking down the City are just “clickbait”, he has a point, but he shouldn’t worry. These things turn.As for the free marketers demanding government intervention to save the free market, they’re always an unintentionally amusing sideshow.

If our analysis is right, this is a pro-UK story. The big money from the US and elsewhere wants more of Britain, not less.

If deals kick off in the fourth quarter, like the bankers say in private that they will, all this stuff about a crisis on the London stock market can go away.

Maybe then we can ease off on our favourite national pastime; talking ourselves down.