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Henderson European Focus Trust: Half-year Results


Lowland Investment Company plc

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Taking a stand on takeovers

A glut of takeovers among UK businesses means that there are far fewer listed companies. Laura Foll of Lowland Investment Company argues it may be time to start opposing these offers...

Last year a stock within Lowland had a takeover offer roughly every couple of months. The pace has not dropped this year. We have already seen another two – one for Wincanton, which their Board recommended, and one for Elementis, which was rejected.

Typically offers came in at a significant premium to the market valuation and they helped boost the Trust’s performance. But I still feel guilty. Why?

Some of the takeovers were at what most would consider a fair price and you could see synergies and opportunities for efficiencies. That was the case with SARIA’s £540m deal to buy the sausage casing manufacturer Devro. Another German company buying a British company was Deutsche Bank, which paid £410m for the broker Numis. The Devro deal was at a 100% premium; the Numis at 70%. I guess you could say everyone was a winner.

Sadly, the same cannot be said about others – particularly those from private equity buyers who in most cases do not bring synergies and are focused purely on taking advantage of weak sentiment towards UK stocks to snap up good companies cheaply.

A good example of that is K3 Capital. This is a business focused on corporate services like tax, restructuring and M&A. It was bought by a private equity company at the beginning of last year. The premium? Just 17%.

At that price you were looking at an earnings multiple in the mid-teens. And this for a business growing by more than 20% a year organically, with cash on its balance sheet and a very attractive operating margin.

We opposed the deal and were disappointed when it was passed, but I can understand why other managers may have given it the nod. If you are managing an open-ended fund and facing redemptions, you may have to sell. And in a relatively illiquid market like this it must have represented a useful opportunity for some.

The same happened again when private equity buyers came in to swallow Finsbury Food, which makes baked goods for supermarkets. That deal – priced at £1.10 – valued Finsbury at just 11x this year’s earnings. Yes, it was at a premium of close to 60%, but the share price was on a low. The offer was not much beyond where Finsbury had been trading earlier in the year. It was an opportunistic deal.

I liked Finsbury. It was a well-managed company with a strong balance sheet and had potential to grow internationally. But we didn’t wait for the transaction to go through. We sold straight away when the share price bounced.

I felt guilty, but there are no shortages of opportunities in the UK at the moment and it seemed sensible to move on.

What saddens me is that both these companies are now lost to public markets. In the past five years we have seen the number of listed companies in the UK shrink by 20% through acquisitions or mergers. In 2023 the AIM market alone shrank by 12%. And we are not seeing IPOs to counterbalance the outflows.

A healthy equity market is important for the UK economy. These markets are a vital source of capital for entrepreneurs. They enable companies to grow, create jobs, invest and flourish.

I believe we have reached the point where fund managers, including me, need to be more resilient in opposing these cheap offers.

In the meantime, UK investors may want to take a leaf out of the private equity buyers’ books. The volume of these deals shows that they see the UK market as full of great opportunities. On that score at least we are in complete agreement.

Click here for more information on Lowland Investment Company


Balance sheet
A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Earnings per share (EPS)
EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.

A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.

Initial Public Offering (IPO)
The process of issuing shares in a private company to the public for the first time.

When the market price of a security is thought to be more than its underlying value, it is said to be ‘trading at a premium’. The opposite of discount.

Share price
The price to purchase (or sell) one share in a company, not including fees or taxes.


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Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.
    Specific risks
  • If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
  • The Company may have a particularly concentrated portfolio (low number of holdings) relative to its investment universe - an adverse event impacting only a small number of holdings can create significant volatility or losses for the Company.
  • Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
  • This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
  • Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
  • The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
  • The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.