- Average bid premium on UK companies hits 51% for UK stocks in 2023
- Interest rate cuts could prompt private equity firms to make bigger acquisitions in 2024
- Clear themes among 2023 takeovers as buyers look for bargains
- Fewer large cap takeovers over past year as rising rates increase financing costs
AJ Bell investment analyst, Dan Coatsworth, says:
“The UK stock market continues to be a hotspot for takeover activity as buyers look for companies trading below their true value or ones that would strengthen their capabilities.
“The average takeover premium in 2023 for UK stocks was 51% versus 37% in 2022 and 43% in 2021. That is great news for anyone receiving bids on stocks in their portfolio but implies the UK market is still undervaluing companies. With no sign of a major re-rating in UK equities, expect to see more takeover activity in 2024 as there are still companies going cheap.
“Buyers in 2023 have been a mixture of private equity firms or industry players looking to buy rivals to gain scale or to get a foot in the door for a new sector or geography.
“What is interesting is the lack of large cap takeovers. This is likely to have been the result of a sharp rise in interest rates over the past two years which made debt financing more expensive and multi-billion pound or dollar transactions harder to stomach.
“Private equity firms flourished during the extended period of low interest rates, borrowing money cheaply to buy companies and extracting cash to help pay off the debt. With signs that interest rates might have peaked and central banks might cut rates in 2024, we could see private equity firms prepared to go after bigger targets.
“Looking ahead, takeover targets in 2024 are likely to include those that have suffered a bruising year but still hold a strong strategic position. Betting company Entain, for example, has scale in the UK but has recently lost its CEO after a troubling year and has garnered interest from potential suitors in the past. Likewise, Revolution Beauty has seen its share price tumble in recent years and it already has close ties with a potential buyer in Boohoo, which owns a stake in the firm.”
Biggest bid premiums for UK companies in 2023:
Source: AJ Bell, company announcements. The bid premium represents the extra amount of money the acquirer is paying to buy the company versus its market valuation on the day before the bid went public.
Four common themes in this year’s takeovers:
- Acquisition enables expansion into a new country
That is the rationale behind CoStar’s £100 million acquisition of property portal OnTheMarket. The purchase price is tiny compared to CoStar’s own $36 billion valuation, but strategically interesting as it gives the buyer a foot in the door for the UK market and the opportunity to try and take market share from Rightmove. CoStar is a big player in the US and this acquisition could give Rightmove and UK peer Zoopla sleepless nights.
- Opportunistic bid following share price weakness in a rival
Mars pounced on Hotel Chocolat while its shares were depressed and offered a large premium to the market price to buy the business. This is a classic example of one firm simultaneously expanding its own operation and pacifying competition from a rival when the right price creates an opportunity.
- Private equity looks to the bigger picture when buying undervalued companies
Private equity will often use the acquired business as a roll-up vehicle to make acquisitions in a certain sector or tap into a network of contacts to help improve the acquired company.
For example, Brookfield is in the process of buying London-listed Network International and has indicated a desire to merge it with another payments group it majority owns, called Magnati.
- Buyer believes target would be better under private ownership
One of the downsides of being a listed company is constantly being in the spotlight. Investors are judging every move and that can be a distraction if a business is going through a challenging period and wants to focus on the recovery.
For example, Apollo is in the process of buying Wagamama-owner Restaurant Group and believes it is better away from public markets. Restaurant Group has suffered mixed fortunes in recent years – its posh pubs arm and Wagamama have been successful while there have been troubles elsewhere. The share price has been incredibly volatile but Apollo is taking a long-term view and believes it can get the business back on track.