Could takeovers spark a UK stock market revival?

Wincanton, Hotel Chocolat, On The Market and SCS are very different companies, but they have one thing in common.

Like the other 20 British companies that have recently fallen prey to takeovers, the logistics group, the chocolatier, the property portal and the banking chain were seen as temptingly cheap.

As revealed last week, Wincanton, whose clientele includes Waitrose, will be taken private in a £556m deal, which was 52 per cent above its share price before the arrival of bidder CEVA, the French global logistics group.

Previously, the typical bid premium was 30-40 percent. The powerful Mars Incorporated, the owner of Hotel Chocolat, paid 168 percent more than the target’s share price at the time of the offer. However, note that the 375p per share offer for Hotel Chocolat, known for its Sleekster collection, was still below the share price peak of 540p at the end of 2021.

So who will be next, as the spotlight turns to the bargains that may be on offer in Britain’s unloved markets? You may be inclined to give little credence to bidding discussions.

But the dissatisfaction in the boardroom is a reason to pay attention to the rumors that are now emerging.

Many directors are said to be dissatisfied with the poor performance of their companies’ shares, which may make these bosses more willing to consider an approach.

Alexandra Jackson, manager of the Rathbone UK Opportunities fund, explains the background. “The share prices of some mid-cap companies now appear seriously undervalued,” she says.

‘The markets are punishing companies more severely for bad news, or even for the threat that AI can pose. We think some of these names will trigger bids, especially if their models are under cyclical pressure, rather than structurally breaking down.

‘We notice that there is a wave of new board members among this group. That is of course not unexpected after a difficult period. But what’s interesting is how many of these recently hired employees have sold their previous companies.”

This shift in board composition is another compelling reason to take takeover rumors into account. I may be a buy-and-hold investor – which is why I have interests in funds such as Rathbone UK Opportunities and mid-cap tracker Amundi, which focus on UK mid-caps. But I also enjoy a bidding war and the chance for a great outcome.

Brokers Peel Hunt claim the acquisitions of Wincanton and the other 20 recent targets ‘provide a glimpse of the coil spring that could be released to launch a new wave of higher volume, higher value activity in 2024 as the outlook for funding costs become more confident. ‘.

If rates fall, US private equity predators could come on the prowl, fueling the row over foreign buyers buying up UK plc for next to nothing.

According to S&P Global Market Intelligence, the private equity industry has a record $2.59 trillion in cash reserves. The most powerful players include Blackstone, KKR and Apollo, which paid £506 million for The Restaurant Group at the end of last year.

But Peel Hunt is also predicting more shareholder activism in 2024. Michael Nicholson, Peel Hunt’s head of mergers and acquisitions, said: ‘We expect the convergence of rising demand for UK assets and UK institutional investors looking to price in an improving outlook will lead to a increase in shareholder activism. create greater tensions between buyers and sellers – and between target groups and their shareholders.’

The focus on mid-market and smaller companies will continue, but lower interest rates could make larger companies a more viable proposition for private equity and trade buyers.

Burberry, the £4.46bn FTSE 100 member, is rumored to be one of the candidates. The luxury brand’s shares have fallen 45 percent in the past six months.

At the moment, Burberry’s bags and jackets seem to lack the polish that makes the Hermes equivalents so desirable, even though they are vastly more expensive.

Other FTSE 100 names also mentioned: Centrica, owner of British Gas; the power generator Drax; Ladbrokes’ owner Entain; Reckitt, maker of Gaviscon and Nurofen and also Unilever, which brings us brands like Dove and Marmite.

Entain shares are down 37 percent in the past twelve months.

This has fueled rumors that US gaming giant MGM – which made a bid for Entain in 2021 – could emerge as a candidate again. They have a joint venture in the online sports betting company Bet MGM.

There will be more speculation like this, even around colossal companies like the £96 billion BP.

This week, for example, the controversial financial group Abrdn was perceived as vulnerable. Shares are down 25 percent in the past six months. The announcement of a cost-cutting plan appears to have raised fairly calm concerns.

If you own shares in any of these companies, now seems like the time to sit tight, wait out developments and hope that this speculation will fuel the revival of our stock markets this year.