When Boris Johnson last year proclaimed that Britain would make it “easier than ever for the world to benefit from what we have to offer” he would not have expected to be taken quite so literally by overseas corporate raiders.
Almost two months after Brexit, the value of British businesses sold to overseas buyers is the highest on record for that period, at close to £20bn, according to Refinitiv. This comes on top of the 810 inbound deals with a combined value of £137bn during the second half of 2020, another record, making the UK the most popular destination for cross-border investment after the US.
The UK is likely to lose some of its best-known companies as a result. Insurer RSA’s 300-year history in Britain looks set to end in a £7.2bn takeover from two overseas rivals. Other deals have emerged for motor recovery group AA; bookmaker William Hill; financial groups IHS Markit and AFH Financial; security firm G4S, games maker Codemasters, property firm McCarthy & Stone and the 178-year-old insurer LV=. Aggreko is in discussions with a private equity-backed consortium from the UK and US.
“UK plc is on sale,” said Richard Bernstein, who runs fund manager Crystal Amber. He pointed out the relative cheapness of UK mid-cap stocks in particular, which “have been marooned in terms of ratings”.
“There are a swath of well managed UK mid-caps that trade at well below replacement cost,” he said. “Unfortunately, there are few [investors] who have the conviction to take a medium view as a part owner of a business. The UK is now politically stable and so overseas predators find it attractive.”
Sir Nigel Rudd, who, as chairman, sold UK companies including Pilkington, Invensys and Boots to foreign buyers, agreed that investors were failing to properly value British industrial companies. This has left them vulnerable to opportunistic bids in the wake of the pandemic and Brexit.
“My concern coming out of Brexit is that UK companies will be sold cheaply,” he said. “The number you start with is quite important. A chairman defending a UK company has to add 30 per cent to the share price and then start talking about a premium.”
US investors were prepared to see companies take on debt to grow, whereas UK fund managers were now saying they were “really worried about the level of debt you have”, he added.
Sir Nigel is chairman of Signature Aviation, which is weighing a £3.5bn bid from a private equity consortium, as well as Meggitt, the aerospace supplier whose shares are trading at levels last seen in 2016, following the grounding of the 737 Max and collapse in global aviation as a result of the pandemic.
While Sir Nigel insisted the 60 per cent premium being offered for Signature was a “fantastic price”, he was also concerned that many midsized companies with strong market positions could be sold cheaply. This had implications for Britain’s industrial future, he said.
Alex Ballantine, head of global industrials at investment bank Baird, said that while valuations of US industrials were “higher than ever . . . the UK is definitely being penalised for Brexit and Covid”.
But with hopes that the UK will emerge quickly out of the worst of the pandemic, given a rapid vaccination programme, investors are moving equally as swiftly to look for companies whose valuations reflect the troubles of the past 12 months rather than the promise of a “roaring 20s” return to form.
On a price to earnings basis, the UK market is at its lowest point in the past two decades against other leading economies, according to JPMorgan. It is trading at less than 14 times, compared with 23 times in the US and an overall eurozone estimate of 17.
The UK was by far the worst-performing equity region last year, down almost 15 per cent in dollar terms, and underperforming the eurozone by about a fifth.
“We are doing a lot of defence work,” said Steven Fine, head of broker Peel Hunt. “Boards are finally seeing a way out of all of this but risk being picked off as the share price does not reflect where trading prospects are heading.”
David Lomer, head of UK investment banking at JPMorgan, agreed that the end of Brexit uncertainty, combined with optimism over the pandemic, had led to an “unbelievably busy” period for UK M&A.
“There is a greater degree of unsolicited activity by buyers seeing value. The UK is looking at an all time cheap level on relative valuations although it all depends on the company when you compare against peers.”
Advisers said the M&A boom had been fuelled by easy and cheap access to cash and debt. Private equity groups are sitting on record funds, while the emergence of special purchase acquisition companies in the US and increasingly Europe has added to the list of potential acquirers.
“We have just had one of the busiest quarters on record with all facets firing at once from strategic deals between rivals to takeovers by private equity investors,” said James Arculus, head of UK M&A at Deutsche Bank.
“Investors are seeing the snapback of growth, anticipating a post Covid recovery out of recession.”
Stuart Ord, head of M&A at Numis, pointed to particular activity in mid-market stocks in the FTSE 250. “The US M&A market is booming. Corporates, private equity and Spacs — some of which have European mandates — are well placed to do deals. A lot of companies look undervalued and advisers are talking to them about defence.”
Management and shareholders are increasingly wary of accepting initial offers, often arguing for the more long term view of prospects beyond the pandemic.
UK gambling company Entain rejected an £8bn bid by MGM at the end of last year, arguing that it “significantly undervalued” the business.
US private equity firm Platinum Equity Advisors walked away from an attempt to buy pub group Marstons. Again, the offer undervalued the business, according to management, at a 19 per cent discount to the company’s share price at the start of 2020. Other offers for companies such as Elementis have been rebuffed.
“There have been lots of opportunistic offers that have not seen the light of day,” said Ord.
Trevor Green, head of institutional funds at Aviva, said investors were trying to take a longer term view — “where values will be materially higher in five or ten years”. He urged boards to have patience by committing resources to growing businesses — especially in the tech sector.
“We do have good tech [companies] but they tend to be taken out before they can reach their potential.”
Lomer agreed that growth companies were in favour with investors, but that meant many high quality, high free cash flow yielding stocks were trading at a particular discount. “All boards in the UK are very wary of opportunistic bids that fail to reflect the long term prospects.”
Takeover activity is not all into the UK. Just weeks after turning away MGM, Entain made a £2bn play for part of Tabcorp, the Australian operator.
Cyrus Kapadia, chief executive of Lazard UK Investment Banking, believed further corporate activity was likely as companies emerged from the worst of the pandemic — and more needed financial help.
“Covid-related fiscal and monetary support from governments and central banks has existed for some time, but when that tails off there will likely be a greater degree of corporate balance sheet restructuring — which could in turn lead to more deal making activity.”
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