The cheap UK shares to buy before they get picked up in takeovers

Britain’s takeover mania returned with a vengeance this week, with £3 billion worth of bids unveiled on Tuesday.

Such is the insatiable hunger of sea predators FTSE 100 and FTSE 250 companies that they have gobbled up $110 billion (£81 billion) worth of businesses in the past year.

One analyst likened the behavior of private equity and other bidders to customers at an ‘all-you-can-eat buffet’, with previously overlooked British companies suddenly becoming tasty fare.

If you’ve dined elsewhere, you should start scanning the available choices, as this column has suggested all summer.

Consider it your patriotic duty to hold British shares and funds, with the possibility of a lucrative reward.

George Godber, co-manager of the Polar Capital UK Value fund, said: ‘We believe the UK market offers exceptional value as the cheapest developed market in the world.’

Merger mania means our stock markets are shrinking, with implications for tax revenues, as Godber notes: ‘The UK markets represent a crucial 13 percent of total tax revenues.

‘While new Chancellor John Healey will have a very busy entry, it may be wise to pay some attention to what needs to be done to protect this.’

But while there will be more such calls in the run-up to next month’s budget, ministers appear to be “in denial” about these and other economic challenges, argues Lord O’Neill, a former Goldman Sachs economist and an ally of Prime Minister Andy Burnham.

This suggests that sales of what estate agents Peel Hunt call ‘the family silver’ will continue.

Here’s how to understand UK plc’s appeal to bargain-loving US billionaire hedge fund managers – and how to make the most of the bonanza.

The latest objectives

The biggest name in this week’s £3 billion bid is Bodycote, the Macclesfield-based thermal processing company.

Veritas, an American private equity player, is vying for the new owner and is offering £1.64 billion.

This equates to 940p per share as a dividend is included. But the rise in Bodycote’s shares to 949p signals a battle is looming, with rival private equity group CVC telling Bodycote shareholders ‘to take no action’. In light of this, the company could be worth an early fall shakeup.

Also picked up is Gamma Communications, which will be bought by British private equity firm Epiris for £1.08 billion. The offer of 1,419 per share is 53 percent above Gamma’s price when Epiris came on the scene in April.

Yet this may not be the end of the story. Meanwhile, Capricorn Energy will become part of Norway’s oldest oil company, DNO, paying £293 million (€384p) per share.

This is 45 percent above Capricorn’s share price in the spring, when the company became the subject of takeover interests.

The list of other companies gobbled up this year includes insurance broker Beazley, DCC Energy and easyJet, for which Apollo, another US private equity powerhouse, is paying £5.7bn, or 715p per share.

This compares to the 399p the airline was trading at before candidates emerged.

New bidding tactics

The government’s apparent disregard for the damage being done to stock markets is just one reason why bids are succeeding.

Fund managers who believe in a bright future for the assets they own tell me they are trying to convince managers to reject an inadequate bid for their company.

But these top executives say managers like the sound of better salaries. They are also attracted to American-style board meetings, which focus on expansion rather than regulatory compliance, as is often the case in Britain.

Winning over directors isn’t the only way for the predators. Law firm Herbert Smith Freehills Kramer says this has been the year of the ‘bear-hugging’ offer, which appeals directly to shareholders despite board resistance.

Segro, Britain’s largest listed property company, collapsed last month to San Francisco giant Prologis in a £14 billion (1,031.7pa share) deal.

Prologis could acquire Segro’s data center empire for what some consider next to nothing. But the offer represented a 39 percent increase in Segro’s share price in June, so it appears the directors had to agree.

Next opportunities?

The economic backdrop may not be inspiring. Still, the FTSE 100 and FTSE 250 are both up around 8 percent since the start of the year.

This is partly due to the popularity of old-school “Halo” – asset heavy, low obsolescence – companies in defense, tech, infrastructure and other sectors whose fortunes will not be derailed by AI disruption.

The love affair with such operations has been heightened by concerns surrounding the potential bubble in the shares of US tech titans spending huge sums on AI.

Ben Yearsley of Fairview Investing says: ‘The FTSE 100 component – ​​banks, energy companies, miners – looked very dull when technology shares were all the rage. But apparently boring is now the new exciting.’

The appeal of such companies is illustrated by last year’s acquisition of scientific instrument group Spectris for £4.2 billion. KKR, the private equity titan, handed over a share of 4,175 per year, a premium of 105 percent.

The new irresistible nature of some boring British companies suggests that, as this column has maintained, it is worth staying tight in the FTSE 100 and FTSE 250 stocks and in British funds and trusts.

It seems like almost everything is up for grabs, which is both alarming and exciting.

In recent days, however, one sector has emerged as perhaps the next hunting ground for private equity: asset management groups, the managers of around £1.5 trillion of the country’s savings.

Ken Wotton, manager of Gresham House Strategic Equity Capital, says the recent acquisitions of Brewin Dolphin, Charles Stanley and Mattioli Woods illustrate the desirability of asset managers. Earlier this year, NatWest acquired Evelyn Partners, owner of Bestinvest.

He names Brooks Macdonald as one company to watch as the turnaround under CEO Andrea Montague begins to deliver results.

The £2.5bn Quilter group could also be an addition to a bank looking to target affluent customers, according to Wotton.

Investing in a share solely on the basis of bid speculation is dangerous.

But the activity is boosting UK shares – making supporting Britain potentially one of the most exciting options for your autumn portfolio rebalancing.