Who needs the new year sales? Glance at the latest research from Canaccord Genuity’s Quest team and you can’t help conclude that UK-listed companies are on sale every day. To boot, on its analysis, plenty of household names are ripe for takeover: the likes of Marks & Spencer, Tate & Lyle and ITV.
Headed “M&Ade in the UK”, the 82-page note from analyst Graham Simpson not only looks back at 2024’s “bumper” year for mergers and acquisitions but forward to undervalued companies with just the free cashflow metrics to appeal to private equity. And, while punting on takeover targets can be a ruinous way to build a share portfolio, Simpson’s appraisal has rigour.
It’s depressing, too, for anyone who wants a thriving UK stock market. As he puts it, Quest has for eight years been “highlighting the degradation of the listed smallcap/midcap investible universe” but the situation is now “the worst we’ve ever seen”: an issue exacerbated by “a non-existent IPO market for several years, which is likely to continue into 2025 given the negative UK macro outlook”.
In a bid to capture the level of interest in UK takeovers last year as well as what happened, Quest totted up every deal that was “announced, closed or cancelled”, with an enterprise value (equity plus debt) of more than £10 million. It found 222, totalling £154 billion. And, while that included one abortive biggie — BHP’s tilt at Anglo-American — that still left more than £100 billion of bids. Companies that did get sold included DS Smith, Hargreaves Lansdown and Darktrace.
Three things stand out. First, that 77 per cent of the deals were non-quoted companies — “the massive soft unlisted underbelly of UK corporates”, as Simpson put it, acquired “before they even have a chance to join a UK stock market”. Instead, they are being snapped up by private equity or foreign raiders, with last year’s bigger deals (£2 billion-plus) including the smart meter outfit Calisen, data group Preqin and Eyebiotech, a business founded by SV Health Investors, home of Dame Kate Bingham, who chaired the Covid vaccine task force.
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Second, that despite all this M&A, Quest reckons the UK market is still cheap. At the bottom end, “an unnecessarily long gap” to Rachel Reeves’s budget and unfounded fears that she would axe inheritance tax benefits “saw an Aim sell-off from which the market has not recovered”. Higher up, on various valuation metrics, including free cashflow, dividend yield, price-earnings multiples and book value, Quest finds UK large caps trading at a “10 per cent to 20 per cent discount” to the ten-year average, with smaller and mid-size stocks at discounts of “30 per cent to 40 per cent”. By contrast, it reckons the US market is “39 per cent expensive”.
Hence, the third point: that UK companies remain “attractive takeover targets”. Focusing on listed businesses, Quest found 309 with a metric it finds particularly useful for evaluating bid targets: “a leveraged buyout free cashflow yield of 10 per cent or above”. Put simply, this is a typical measure used by private equity to assess whether a company has enough cashflow both to cover all its costs and deliver surplus cash.
Quest then assessed other issues, including financial strength and having no shareholder with blocking stakes, to narrow the list to 90. The result? Apart from the trio named above, its bid “picks” also include Sainsbury’s, Jet 2, Dunelm, Hikma Pharma, Babcock, Clarkson and Computacenter. Of course, none of this means Quest has hit upon the right targets. Still, more UK market evisceration looks the way to bet.
Growth conundrum
Meanwhile, Britain is bearing the brunt of a bond market rout. True, yields have been rising globally but, as Fidelity’s Mike Riddell noted, those on UK gilts “have risen a little more than in other markets at a time when sterling has sharply weakened”: the exciting combo previously brought to us by the mini-budget meltdown of Liz Truss and Kwasi Kwarteng.
This is no rerun — at least not yet. But, when the yield on UK gilts hits 4.82 per cent, its highest since 2008’s financial crisis, and the 30-year is at 1998 levels, it’s hard not to see things as the markets’ view on Britain’s prospects under Sir Keir Starmer — not least that investors want a higher price to hold UK debt. Indeed, the UK-focused FTSE 250 also fell 2 per cent, with the downer on Britain one reason it’s cheap.
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Labour had 14 years to prepare for government. And it got elected on a manifesto to “kick-start growth”. Yet it’s taken the markets six months to decide it’s not serious about that.
Instead, Rachel Reeves gave us a growth-free budget, which left her just £9.9 billion of headroom against her fiscal rules despite raising £40 billion in new taxes. Worse, with an interest bill of £100 billion-plus a year to service, rising gilt yields have wiped out the headroom. If they stay at these levels, she faces an invidious choice, unless she breaks her rules: more taxes or spending cuts. How will either boost growth?
Bookies’ mare
Serves it right. Back in the day, the group now known as Flutter Entertainment merely owned brands like Paddy Power, keen on irreverent ads such as two old ladies crossing a busy road, with odds and the caption: “Let’s make things more interesting.” Then, it bought FanDuel, got all Yankee Doodle and shifted its main listing to New York.
And now? The locals have taken it for $438 million, punting on their bizarre sort of football, played with the wrong-shaped ball. Apparently, there’ve been 184 winning favourites from this season’s first 256 games. And, on “National Tight End Day” (don’t ask), even Taylor Swift’s boyfriend scored. What would Paddy’s ad wing make of that?
