UK PLC – now on sale
Six weeks into a post-Brexit 2021, the value of UK businesses sold to overseas buyers hit £25.7bn – over three times the value recorded during the same period of 2020 and the highest for two decades, according to data from the London Stock Exchange-owned research business Refinitiv. Domestic mergers and acquisitions (M&A) activity was also high at £7.9bn, a three-year high, but the bulk of the deal-making was inbound investment, with London-listed businesses becoming the in vogue target for cash-rich companies and buyout groups looking to snap up bargains whilst expanding their reach overseas.
The M&A feeding frenzy reflects continued recovery and is a continuation of activity experienced in the last six months of 2020: 810 deals valued at an aggregate £137bn were announced during the second half of 2020, a record high in terms of both number and value of deals. 2021 transactions involving US and Japanese buyers accounted for 35% and 17% of UK target M&A by value, with healthcare the most targeted sector, representing one-third of deals. By deal volume, the UK was the second most popular destination for cross-border investment globally, after the US.
The UK is set to lose a number of its most well-known companies. Insurer RSA, a UK business for 300 years, is the subject of a £7.2bn takeover from two overseas rivals, whilst Allied Universal is paying £3.8bn for security firm G4S following an auction. Other deals have emerged for:
- bookmaker William Hill, which is being taken over for £2.9bn by US gaming giant Caesar’s Entertainment
- the AA, which agreed a sale to Warburg Pincus and TowerBrook last year
- property firm McCarthy & Stone, being acquired for £647m by US private equity group Lone Star
- Apple-supplier Dialog Semiconductor, which agreed to a $6bn all-cash bid from Japan’s Renesas Electronics
- Aggreko, a supplier of power generation equipment, which is the subject of an agreed £2.2bn bid from a private equity-backed UK/US consortium
- financial groups IHS Markit and AFH Financial, games developer Codemasters, pub chain Marston’s, and another insurer LV=
The UK is cheap
To committed UK market watchers, this will likely come as little surprise. The domestic market has been unloved – and undervalued – for some time now, particularly since the 2016 EU referendum, and the COVID-19 pandemic has done further damage to its fortunes. Whilst global equity indices, universally battered during the early part of last year, have recovered substantially, with some rising to record highs – during 2020 as a whole, the US S&P 500 Index and China’s CSI 300 both gained circa 22% – the UK’s FTSE 100 was down over 15%.1 UK index composition has not helped matters, with the conspicuous absence of high-growth tech stocks and a preponderance of banking and energy businesses, two sectors which have languished in recent years. The US has Zoom, the UK has BT; the S&P 500 can boast Netflix and Amazon; the FTSE 100 can lay claim to ITV and Sainsbury’s. In August of last year, Apple became the first corporation to hit a market cap valuation of $2 trillion, more than the entire FTSE 100.
On a price to earnings basis, JP Morgan calculates that the UK market is trading at less than 14 times, compared with 23 times in the US and an overall eurozone multiple of 17.2 According to the Financial Times, the last time the UK market was this cheap, relative to the global average, was 1973 with the UK reeling from the global oil crisis, fuel shortages, power cuts, national strikes and a three-day working week. Those of us of a certain vintage will remember doing our school homework by candlelight.
In addition to the manifest discrepancy in valuations, a number of other factors are fuelling the brazen bargain-hunting. The UK’s ‘no tariffs, no quotas’ trade deal with the EU, avoiding a punitively disorderly crash out of the single market, has undoubtedly been a powerful catalyst in forcing a rethink. Pent-up corporate demand is widespread, given the extent to which acquisition activities were stymied during national lockdowns as businesses focused on balance sheet protection. Confidence amongst boards and managements – arguably the most central ingredient in stimulating M&A aspirations – is recovering in line with mounting optimism about the economic outlook for 2021, not least in light of the UK’s highly efficient roll-out of a number of effective coronavirus vaccines. EY’s Global Capital Confidence Barometer reveals that just over three-quarters of UK executives surveyed expect to hit pre-virus levels of sales in 2021 and profitability during 2022.
Some UK businesses hit hard by the effects of the pandemic are increasingly open to approaches by private equity firms, given that they are likely to find it easier to regain their momentum in private hands rather than being exposed to the constant scrutiny of the public markets. Finally, private equity firms are sitting on record committed funds – about £2.8 trillion according to consultancy Bain – and monetary conditions are supportive: an ultra-low, or possibly even negative, interest rate environment is set to persist for at least another 12 months and, with plentiful supplies of cheap money available to CEOs, there seems little prospect of their appetite to borrow in order to fund target acquisitions being dampened.
Despite the febrile environment, fuelled in part by growing confidence amongst company boards, it is a sobering thought that a significant body of research demonstrates that, on average, M&A destroys more shareholder value than it creates. With that in mind, one might be tempted to equate ‘confidence’ with ‘hubris’, on the basis that management teams seriously overestimate their ability to integrate acquisitions successfully … or to deliver the benefits they have indicated will ensue!
Given the relative attractiveness of UK businesses from a valuation perspective, it’s arguable that most of the market sits within the cross hairs of an acquirer’s sights. However, given the fact that their ratings have been stagnant for some time, mid-cap stocks are receiving the bulk of the attention: aside from the obvious fact that their size renders them easier to absorb, their valuations are more aligned with the UK domestic economy than those of FTSE 100 constituents which have a markedly more global earnings profile. A great many mid-caps are well-run but are nevertheless vulnerable to an opportunistic approach in the wake of short-term difficulties as a result of the pandemic and Brexit. Given the UK’s speedy vaccination programme and concurrent expectations that the country will emerge strongly out of the worst of the coronavirus crisis, investors are reacting equally speedily to target businesses whose ratings remain reflective of yesterday’s troubles rather than tomorrow’s opportunities.
UK businesses, abetted by unprecedented state support, were not slow to insulate themselves from the worst effects of COVID-19, in many cases taking rapid action to conserve cash, trim costs, buttress balance sheets and rethink their operational models in response to a more ‘remote’, digital environment. Whilst some have found adapting to the new world uniquely challenging, others have successfully reshaped themselves, and at an accelerated rate, and are consequently well-positioned to meet those challenges. Ratings, in many cases, have yet to keep pace with this transformation, which should serve to make 2021 a landmark year for the UK in terms of M&A activity. The buyers are circling.
1Source: to 15.03.21
2Source: Financial Times, 01.03.21
3Source: EY, Global Capital Confidence Barometer, 23rd Edition, February 2021
Merger and Acquisition (M&A) – A consolidation of companies. A merger is the combination of two companies to form one, while an acquisition is one company being taken over by the other.
Market Capitalisation – The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size, and is often abbreviated to ‘market cap’
Mid cap – Mid cap companies tend to be valued between $2 billion and $10 billion. A company’s market value is calculated by multiplying the number of shares in issue by the current price of the shares