Take-private deals treble as investors shop for bargains in public
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The total value of UK “take-private” deals has more than trebled in the last 12 months as private equity increases its focus on the UK stock market.
Regional firms have been the focus of a number of the deals, with supermarket chain Morrisons, property group St Modwen, and wealth manager AFH Financial among the listed companies to have accepted takeover offers this year.
Analysis by global law firm Mayer Brown found in 2016-17 there were nine take-private deals worth £2.72bn, followed by 10 in each of the next two years. Then in 2019-20 there were 20, with a combined deal value of £9.35bn, before 2020-21 delivered 24 deals worth a total of £28.59bn.
Mayer Brown partner Perry Yam said: “Competition for large unlisted companies is now so fierce that more PE buyers are willing to take on the extra regulatory and reputational challenges of acquiring a large, listed company.”
The 2020-21 take-private figures, for the year to July 23, have been significantly boosted by two major deals. FTSE 100 supermarket chain Morrisons accepted a £6.3bn takeover bid led by US private equity firm Fortress while defence group Ultra Electronics has recommended a £2.6bn offer from private equity-owned Cobham.
Those figures don’t include Morgan Stanley Infrastructure’s deal, worth up to £315m, for Yorkshire waste management business Augean which was revealed late on Friday.
And US tech firm’s Parker-Hannafin’s planned £6.3bn purchase of manufacturer Meggitt announced yesterday is not strictly a “take-private” deal, as it is not a private equity-backed deal, but will still see another UK firm delist and become American-owned.
Both are the latest evidence of an increase in M&A activity in the UK, which stuttered at the start of the pandemic but never stalled.
It is not just a UK phenomenon. Global M&A activity hit a record high in the first half of this year, with data from EY showing deals worth more than $2.6 trillion – the same as in the whole of 2018.
Low interest rates and a flood of cash towards private equity, as well as Covid-19 vaccines programmes also boosting optimism in the financial markets, are all accelerating deals and deal values.
Financial data group Pitchbook estimated that last September the UK’s private equity sector had £243bn of dry powder that could be deployed, around 50% higher than the long-term average before war chests started to fill up, and overflow, after 2017.
“Private equity firms have plenty of ‘dry powder’ as investors increase their allocation to PE as an asset class,” said AJ Bell’s investment director Russ Mould.
“This is partly in response to a good run of performance and partly out of a desire to diversify portfolios, especially when returns from bonds and cash look so pawky.”
Darren Boocock, who heads Deloitte’s corporate finance practice in the Midlands, describes there being “masses of dry powder out there” – globally funds have nearly $2 trillion to hand – while the price of credit makes leveraged deals even more attractive.
He said: “Whilst M&A generally has been quite busy, taking UK listed companies off the market has been quite quiet. That was because there’s been a perception for a while that UK PLCs have been fairly valued.”
But he believes several factors have contributed to that perception changing.
“Brexit has gone away, the double vaccine programme means we’re getting to the end of the difficult part of Covid, plus actually coming out of it looks like UK companies have got quite strong growth prospects,” he said.
“Putting all that together, they have not bounced back properly from the depression of Covid and they now look undervalued.”
Yam, who is co-head of the global corporate and securities practice at Mayer Brown, highlighted the sluggish growth of UK valuations compared to its international rivals.
He said: “While valuations have soared in US markets, the UK stock market has grown at a far slower pace over the last five years. This has caught the eye of private equity firms hungry for deals.”
The FTSE 100 is the single worst performing major global stock market index and the FTSE 250, FTSE 350 and FTSE All-Share are all in the bottom quartile.
In a five-year period from the week after the Brexit referendum, to June 30 this year, the FTSE 100 grew 8%. This compared with a 57% increase in the French CAC 40, 63% in the German DAX 30 and 107% in the US S&P 500.
AJ Bell’s Mould said: “That underperformance suggests UK equities are still relatively unloved – and unloved can mean cheap.
“It’s just as Sir John Templeton used to say: ‘Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria’. There was no shortage of pessimism last autumn when this wave of takeover bids first began to roll over the UK.”
Since the end of October the FTSE 100 is up by one-quarter while the FTSE 250 has risen by one-third, reaching record highs. But investors, especially from the United States, remain encouraged by an attractive exchange rate and the perceived value compared with available American companies.
Boocock said: “If the stock market goes on a bull run and share prices continue to increase, they will get to a level where all that upside is effectively priced in.
“The bid premiums are massive at the moment – there used to be a 30-40% premium on the share price, the last few have been 60-70% – which shows that the underlying share price is perceived to be undervalued.”
Morrisons’ £6.3bn deal was at a 42% bid premium (but its shares are now trading even higher, equivalent to 52%, as investors anticipate another bid), while Cobham’s accepted bid for Ultra Electronics was 63% above the share price before its interest was made public, and Meggitt’s deal has been struck at a 71% premium.
“The longer the M&A boom lasts, the greater the risk we are nearing a market top,” said Mould.
“Someone, somewhere will overpay, lose a lot of money and knock wider confidence. Blackstone’s near-$18bn bid for silicon chipmaker Freescale – a business entirely unsuited to a leveraged buy-out – in 2006 and then the $45bn private equity lunge for American utility TXU both rang alarm bells at the time and the top came shortly afterwards.”
Mould recalled the old Wall Street insider wisdom of Fred Schwed, who famously quipped “booms go boom”, then said “ultimately someone will strike a deal that they come to regret.”