Hardly a week of 2023 has passed without another takeover bid arriving for a UK-listed company. And since 2021, a string of FTSE 100 and FTSE 250 companies have attracted merger and acquisition activity.
Selling the UK cheaply
With the UK stock market looking cheap in historical and geographical terms, foreign bidders have flocked back to these shores.
Over the past five years, private-equity firms have spent nearly £80bn taking UK-listed companies private. And with the pound worth $1.24, deal-making by cash-rich US groups is rising.
At end-2022, the private-equity industry had a record $3.7trn of dry powder — that is, investable cash. Partners in these firms are keen to invest this money and earn higher management fees.
The buyout boom is back
With both stocks and bonds recording big losses last year, 2020-21’s frenzied deal-making dwindled in 2022. Yet the past week has seen approaches for several UK companies, mostly in the FTSE 250.
Obviously, bidding groups aim to buy companies trading on low or depressed valuations. After taking these businesses private, they cut costs and hope to drive up growth, generating big profits for partners.
When bidders launch takeovers, they usually offer large premiums to companies’ previous share prices. For example, way back in 2002, I bought shares in one UK-listed firm. The next day, a US giant bid to buy this company at a price 25% higher than the previous day’s close. That was nice.
Could this FTSE 250 firm be a target?
At present, my wife and I own three FTSE 250 stocks — and I think one might attract bidding attention from larger US rivals or buyout firms. The company in question is ITV (LSE: ITV), owner of the UK’s largest terrestrial commercial television network.
My wife bought ITV shares last June at 68.7p a share. As I write, the share price stands at 82.4p, up 20% since we bought. But I expect much bigger gains from this mid-cap stock in future.
Three reasons we bought ITV
We bought ITV shares because they traded on a low price-to-earnings ratio and high earnings yield. Even after recent rises, these numbers are just 7.8 and 12.8% — far cheaper than the wider market.
Also, ITV shares offer a market-beating dividend yield of 6.1% a year, covered 2.1 times by historic earnings. To me, this income is a nice reward for owning this stock.
Third, with a market value of £3.3bn, it could be a tasty morsel to be gobbled up by, say, a giant US media company or buyout group. Were this to happen, I’d expect the firm to be valued well over £4bn.
Who needs a takeover?
Of course, any potential bid is pure speculation on my part and I don’t buy stocks just for their takeover prospects. Then again, on market rumours of a coming takeover, the share price did hit a 52-week high of 96.62p on 9 February. But I don’t care if an ITV bid never arrives. To me, these unloved shares are cheap.
Then again, analysts have warned of falling advertising revenues and increasing spending on ITV’s streaming hubs in 2023. And I fully expect the group’s earnings per share to be lower this year. Even so, I’m quite happy to own this FTSE 250 stock for the long haul — with or without a bid!
