After a record number of transactions in 2021, the UK continues to be a hotbed of global activity when it comes to mergers and acquisitions (M&A). Private equity firms have heavily targeted UK company takeovers, accounting for nearly half of all transactions in 2021. While the US private equity firm Clayton, Dubilier & Rice’s £7.1 billion takeover of Morrisons was one of the most notable transactions of 2021.
Kit McCarthy, partner at Norton Rose Fulbright, comments that “Private equity has clearly been a voracious acquirer of UK listed assets over the past 12 months and that shows no signs of abating in 2022.”
Here, I take a look at what’s driving the appetite for UK companies, the possible upside for shareholders and some of the latest rumours around UK takeover targets.
Why is UK M&A booming?
The principal reason for the booming UK M&A market is the relative valuations of UK companies. According to research by Schroders, “The UK equity (stock) market is trading at a 30% valuation discount to global peers, close to a 30-year low.” The rotation in investor appetite from growth to value stocks may also benefit the perceived upside in the current valuation of UK companies.
Kit McCarthy identifies “sterling remaining in the doldrums” as another factor, together with continued access to low-cost debt. Michael Nicholson, Head of M&A at Peel Hunt, states, “Those big beasts of private equity – KKR, Apollo, Carlyle and so on … have these huge funds to deploy.” International buyers also view the UK as an attractive jurisdiction for M&A activity due to its relatively liberal takeover rules.
How can shareholders benefit from takeovers?
Shareholders in listed companies are generally offered a premium for selling their shares. Ashurst reports that the average bid premium was 42% in 2021. Meanwhile, shareholders in aerospace supplier Meggitt hit the jackpot with a 71% premium offered by US competitor Parker Hannifin.
However, by their nature, company takeovers often occur when the share price is relatively depressed. As a result, some shareholders might have preferred to wait for a recovery in the future share price.
What are the current rumoured takeover targets?
Ultimately, takeovers should be seen as a bonus rather than the primary reason for buying shares. Takeover targets are often smaller-cap companies due to the larger pool of potential acquirers. They may also be trading at low valuations relative to their peers.
Kit McCarthy identifies technology, media, telecoms, leisure and hospitality as the “sectors to watch in 2022” as they “were characterised by elevated activity levels in 2021.”
So, which companies have the takeover rumours been swirling around?
1. Marks & Spencer (MKS)
Ron Emler from The Drinks Business comments that rumoured interest in Marks & Spencer in 2021 from US private equity firm Apollo “has little to do with Percy Pigs and more to do with robot technology.”
He adds that “UK retailers are rich pickings for private equity firms, as the valuations of stores have been dragged down while the economy recovers after the pandemic and Brexit.” The M&S share price rose to a high of over 255p on the rumours, before falling back to around 150p.
2. Pearson (PSON)
Shares in education media company Pearson recently rose to a seven-month high after Apollo made three bids for the company. Roddy Davidson, analyst at Shore Capital, described Pearson as “a fairly unique asset in an area that has already seen a degree of consolidation.” He believes that “the super-tanker has finally been turned” with its US issues largely resolved.
However, Pearson’s share price has since fallen by 8% after Apollo announced it was withdrawing from a potential takeover.
3. Ted Baker (TED)
Fashion retailer Ted Baker has recently rejected two unsolicited bids from US private equity firm Sycamore Partners. Sycamore’s latest proposal represented a near 40% premium from its pre-announcement share price.
Ted Baker is currently on a turnaround plan after profit warnings, changes to management and an accounting scandal. As a result, its share price has crashed from nearly £25 to just over £1 in the last four years. It remains to be seen whether Sycamore will come back with a firm offer.
4. British Telecom (BT-A)
Takeover rumours intensified when billionaire Patrick Drahi raised his stake in BT at the end of 2021. The company has a relatively unstable shareholder base, with Deutsche Telekom making noises about potentially divesting its 12% stake in the next year. If Drahi purchases Deutsche Telekom’s shares, he’ll hit the 30% threshold for a mandatory takeover offer.
However, BT has some regulatory protection as a strategic asset. Neil Wilson from Markets.com comments that “At a valuation of £10 billion, the group has become a definite target.” He adds that the “Openreach crown jewel … would be (worth) considerably more on its own than the group is valued at today.”
Takeaway
While buying shares should be based on company fundamentals, takeovers can reward shareholders with an attractive bid premium. If you’re buying or selling shares, we’ve created a guide to our top-rated share dealing accounts.
