UK stocks – too cheap to ignore?
The UK stock market has not matched the impressive returns of its peers like the Dax, Nikkei 225 and Dow. But it does provide a fertile hunting ground for acquisitions.
UK equities become bid targets
UK equities have become an enticing bargain bin for acquisitive companies, with the Brexit-induced weakness in British markets creating a prime environment for takeover bids at lofty premiums. Yet British companies are still pushing back against some of these so-called generous offers, setting up a tug-of-war as bidders try to seize undervalued assets.
The extent of the undervaluation is stark: the FTSE 350 index trades at a record 40% discount to global equities on a forward price/earnings (P/E) basis. Based on the enterprise value-to-EBITDA metric often used to value targets, the valuation gap widens to around 50%. This depressed level has opened the floodgates for bids at high premiums, with the median running at 34% - near the highest since 2018's M&A boom.
The flow of deals certainly seems to be increasing. So far in 2024 there have already been 12 takeover offers for UK firms above £100 million in market cap, compared to just 5 at this time a year ago. Several transactions like Wincanton's sale to GXO Logistics have commanded premiums over 100%. More bids may be on the way, given the improving economic outlook and the expected decline in interest rates.
Not everyone wants to be bought
Despite these elevated premiums, some UK firms have been giving pursuing companies the cold shoulder. Electronics retailer Currys rejected a 40% premium, barely enough to return its shares to their 5-year average P/E.
UK management teams themselves seem to agree their shares are undervalued, as evidenced by elevated rates of share buybacks amid low levels of equity issuance according to Goldman Sachs. As the bank notes, almost all UK sectors are cheaper than their counterparts in the US.
Bidders need to up their game
While bidders may have ample financial headroom to pay large premiums while still generating attractive returns, there is a growing sense among targets that even these rich multiples are failing to capture the full upside potential. While undervalued by stock markets, UK companies remain confident that they can command higher premiums to reflect the intrinsic value of their businesses.
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