By Tom Whelan, Partner at Reed Smith
Undoubtedly, we have witnessed a spike in takeover activity of UK listed companies after a relatively quiet 2023 and end to 2022, where there was a lack of confidence in dealmaking driven by the fallout from the surge in energy prices from the Russia-Ukraine war, the knock-on effects of higher inflation, higher interest rates, reduced consumer spending, and seller-buyer pricing mismatch.
Although interest rates generally remain high, inflation has begun to come down (albeit more slowly than hoped), interest rates are expected to fall further from August onwards, and the gap between sellers and buyers on pricing has narrowed significantly which, along with likely increased debt availability, should fuel further takeover activity as 2024 progresses.
Pound’s underperformance against the dollar pays off
As regards the current spike in takeover activity for UK listed companies, apart from the expected improvement in macro-economic conditions, there are a number of factors at play starting with pricing. To put it bluntly, the current pricing of listed companies on the UK public markets is seen as good value for buyers, especially compared to the much higher pricing and valuations on the US public markets.
Sterling has weakened significantly against the dollar and is at relative historic lows so, for US buyers, this depreciation just adds to the attractiveness of the UK markets as a destination for picking up quality listed companies on the cheap.
Such pricing dislocation also marries up with lots of US players having buckets of cash to spend, with funds generally sitting on billions in committed capital that needs to be deployed, and lots of large corporates with healthy amounts of cash on their balance sheets again looking for ways to deploy that capital.
Fund investors are also demanding that funds spend the money they have committed to invest, rather than just collect management fees – and shareholders and activist investors in corporates are demanding balance sheet capital be spent or returned.
Public vs private takeovers
This spike in takeovers in the UK public markets also comes at the same time as we are seeing a pick-up in corporate activity in the private markets with a significant increase in the number of sale processes. A common refrain from fund investors at
the moment, in relation to these private sale processes is “there aren’t enough quality companies right now to invest in”. So, with funds under pressure to deploy capital, the obvious place to look instead is at quality companies on the public markets.
Assuming a US buyer is comfortable with being in the public eye, prepared to incur the costs of a full public bid, and their bid is sufficiently compelling (with a sufficient premium above the normal trading price at the time of bid), it is likely to have a clear run, as there are relatively few contested bids. This current UK public market deal dynamic compares very favourably to more competitive private auction processes.
Takeovers of UK companies are also easier to consummate for US buyers as the UK takeover code is well understood, with generally lower thresholds to achieve control, squeeze out and delisting than compared to equivalent markets in Europe, along with no language barriers, and a largely investor friendly regulatory environment for US buyers.
Sector-specific takeovers: tech still at the top of the list?
As regards sectors of interest to US buyers, tech has been and will continue to be a real favourite, although a diminishing sector as more tech companies are acquired.
Expect more takeovers also to be announced in the healthcare and pharma, industrials and manufacturing, aerospace and defence, energy and resources and services sectors. It will be interesting to see if more troubled sectors like water and retail become the subject of bids. If the price is low enough, and possible buyers can see a road to recovery/upside, then yes, otherwise less likely.
What challenges might his pose to UK public markets?
The perceived value gap referred to above between the US and UK public markets has also manifested itself in a number of challenges for the UK public markets, namely:
1. Struggling to attract new companies to list on UK public markets, as we have seen companies choosing to list on other markets especially the US with its greater liquidity and higher pricing resulting in better valuations and stock trading for new companies coming to market;
2. Struggling to hang onto existing listed companies, with market rumours of substantial players considering a move to list in the US, due to lower pricing here, and concomitant vulnerability to being taken over by a competitor; and
3. A generally shrinking public market as more listed companies are delisted as a result of successful take private transactions.
This combination of factors is bad news for UK plc ultimately as it becomes an ever shrinking market. The UK needs to find a way to stem the flow and find its mojo again so it is once again attractive for new companies to list on UK public markets. In the meantime, I predict a lot more take privates by US players to emerge as the year progresses.
