Loose monetary policy sustained for over a decade has pushed asset valuations sky-high. Start-ups can be publicly listed even if they lose billions of dollars while government bonds worth trillions of dollars trade at negative yields. It’s an overvalued world and finding a bargain remains difficult.
Brexit has been a unique wrinkle in this global trend. Britain has had to deal with widespread uncertainty and political upheaval since mid-2016. Since then, the pound has declined by nearly 15%.
Meanwhile, the uncertainty of Britain’s economic and political future has kept a lid on the valuations of companies across the country, creating the perfect environment for value-seeking foreign billionaires.
According to data compiled by Bloomberg, over $9.8bn (£7.9bn) worth of private equity deals for publicly listed UK companies were announced in June alone, making it the busiest period for buyouts in over a decade. Last year, acquisitions of British firms amounted to £28.6bn.
Now, there’s a long list of potential mega-deals in the pipeline. Of course, the most talked about recent deal was Li Ka-shing’s bid for British pub giant Greene King, which was announced only a few months after Fuller, Smith & Turner‘s beer business was acquired by Japanese beer group Asahi for £250m.
Mega-deals like this don’t just help the millionaire company owners and their billionaire acquirers. Benefits of the deal flow down to the average retail investor. Early investors in Greene King, for example, saw their holdings surge 51% within a day when the deal was announced. Similarly, Fuller’s stock surged over 20% when its deal was made public.
Depending on the timing of the investment and the terms of the deal, retail investors like me could expect a massive windfall in this ongoing Brexit-inspired buyout bonanza. Here’s how I intend to benefit from this trend.
Focus on value
Whether it’s a novice investor buying a few shares for £100 or a billionaire dropping the economic output of a small nation on a single company, the focus on intrinsic value remains the same. I believe private equity companies and family offices are focusing on the same factors, such as discounted cash flows and recurring income, as I do.
Li Ka-shing’s team spelled it out, saying he likes to focus on businesses, “with stable and resilient characteristics and strong cash flow generating capabilities.”
So I’m not going to waver from my focus on undervalued companies. However, I believe I should also account for buyout potential to see if a future catalyst could unlock some value.
Seek out potential targets
Certain companies seem to fit a strategic gap for billionaire investors and institutional buyers. Companies that can help them diversify their income streams, bolster their core operations, or lower their costs are all potential buyout targets.
Some of the companies I believe fit this criteria are ITV and SSE. Liberty Global, the US-based owner of Virgin Media, already owns one-tenth of ITV and could bid for more since it has fresh cash raised from recent asset sales in Europe. Meanwhile, SSE is a dominant force in the stable, highly regulated, capital-intensive energy supply business which will always make it a prime target for potential acquirers.
In my opinion, both companies trade at decent valuations and offer attractive dividends to offset the risks of holding them while I wait for a potential buyout to unlock value.
