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LONDON, Dec 15 (Reuters) – As a turbulent 2022 approaches, British companies are fastening their seat belts as bankers and investors expect an increase in takeover activity due to a depressed pound and weak share valuations.
Foreign buyers aren’t exactly flocking to the UK when its economic outlook remains bleak, but the combination of weak share prices and sterling could allay concerns about growth.
Clothing retailer Superdry ( SDRY.L ) was the subject of media reports this week that its founder was in talks over a potential private-equity buyout. Wood Group ( WG.L ), an investor in an oilfield services company, urged the company to buy back some of its own shares so as not to become a target.
Mid-cap companies aren’t taking any chances, according to Philip Noblett, head of UK investment banking at Jefferies, who said many of the bank’s nearly 90 mid-cap corporate UK broking clients believe they could be targets for takeovers, regardless. have The industry they run.
“The international nature of many UK FTSE 250 companies, together with their market leading positions, makes them vulnerable at these valuation levels and we advise all boards to be very secure in the fundamental valuation of their companies and know where they may lose support or shareholders, ” he said.
While the economic outlook may still keep potential poachers away from takeovers altogether, bolt-on acquisitions of subsidiaries of larger companies that have seen their market value decline may be more attractive, investment bankers and analysts said.
“There are undoubtedly a number of companies emerging as potential takeover targets. The main issue for the UK is the risk that … you can buy it now and it could be cheaper next year,” said IG chief market analyst Chris. ” said IG Chief Market Analyst Chris. Beauchamp picks retailers and homebuilders as potential targets.
The domestically-focused FTSE 250 (.FTMC) is down about a fifth this year while the internationally-focused blue-chip FTSE 100 (.FTSE) is up 0.8% due to the pound’s decline.
The FTSE 350 (.FTLC) has a one-year forward price earnings (PE) ratio of 10.9, more than half the benchmark US S&P 500 (.SPX) PE ratio of 17.8 and about 14 for Germany’s DAX (.GDAXI). ), UK stocks look relatively cheap.
“The valuation discount is so significant that M&A could land in a number of places,” said Clive Beagles, UK equity income fund manager at JO Hambro Capital. “US names trade at big premiums in every sector.”
Despite large valuation discounts, the value of inbound M&A for British companies fell to a four-year low in 2022, according to data from Dealogic.
Year-to-date, 848 inbound transactions have been completed with a value of about 99.45 billion euros ($104.74 billion), compared with 1,019 transactions in 2021 for a total value of 151.96 billion euros, according to DeLogic.
Not a great look
The pound, which hit a record low in late September, has lost 8.5% in value in 2022, as investors seek the safety of the US dollar amid uncertainty surrounding the war in Ukraine and rising energy prices.
“Foreign investors now have a very significant currency advantage,” said Scott McKenzie, fund manager at Amati Global Investors, “We expect to see a lot more takeover activity in the coming year.”
About 82% of FTSE 100 companies’ revenue comes from abroad, while the figure drops to 57% for the mid-cap FTSE 250, according to index provider FTSE Russell.
According to Owen Evans, co-head of UK M&A for Goldman Sachs, currency advantage alone does not necessarily kick-start a deal.
“Approaching a company with a proposal based on the fact that the valuation now looks cheap in USD terms is not going to be the way to get the target board or shareholders to accept the proposal,” Evans said, adding that bidders are not accepting. Wants to be seen as opportunistic.
Potential M&A activity in the UK is more likely to come from corporates than private equity, according to Clive Beagles, and not just because of financing difficulties due to the high cost of corporate borrowing.
“Traditionally, the private equity brigade is more interested in recurring, predictable income streams. It allows them to take leverage, but that’s stuff that’s more highly rated and therefore, to me, the value in other parts of the market,” Beagles said. said
He sees value in stocks that can be bought at a discount in assets, or businesses that can be spun off, citing ITV ( ITV.L ) as an example.
“Large corporates continue to look at ‘bolt-ons’, where they can look at existing facilities to make those deals, which is why the mid-cap space is an attractive strategy in this environment,” said Celia Murray, head of UK M&A. At JP Morgan.
($1 = 0.9495 Euro)
Editing by Amanda Cooper and Elaine Hardcastle
Our Standards: The Thomson Reuters Trust Principles.
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