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M&A: shuffling the pack in UK equities

  • 13 July 2021 (5 min read)

M&A activity has been a welcome tailwind for UK equities this year. According to the FT, 2021 is on track to be the busiest year for private equity bids for UK and European assets on record, with private equity groups setting up new teams specifically to acquire UK-based businesses.

The reason for interest in the UK is clear. UK equities remain very attractively valued compared to other major markets, trading at a forward price/earnings ratio of 13, versus 21.2 for the US and 16.8 for the eurozone. In addition, the domestic economy is recovering strongly, with British companies benefiting from growing business and consumer confidence in anticipation of the lifting of COVID restrictions.

Who’s being targeted?

M&A activity is so widespread across industries and sectors it is difficult to say that any particular type of company is being targeted. Some businesses are appealing because of their strong balance sheets, which can then be leveraged up with debt to enhance profits. Others are being targeted as part of the acquirer’s longer-term growth plan, as with JP Morgan’s acquisition of Nutmeg.

Almost inevitably, many potential M&A targets include names held across the UK desk at AXA IM, including Experian and TI Fluids to name but a few. We have also been on the receiving end of bids over the past few months, including Codemasters, Sanne, Sigma Capital, St Modwen and Vectura, which has been the subject of competing offers.

What happens when we get an M&A bid?

Finding out about takeover activity can happen in several ways. Often, we hear about takeover bids when the news breaks in the press. However, it is common for us to be made aware of companies’ plans in advance when we are a significant shareholder or own the business making the bid approach. Management generally like to sound out shareholders to gauge levels of support when they receive a bid, though that is not always the case. We sometimes get asked to sign an ‘irrevocable undertaking’, effectively saying that we will support the bid come what may. We don’t tend to sign these legal documents – after all, a bidding war for a holding is usually in the best interest of our investors.

The premium to the undisturbed share price that M&A bids typically command is based on a business’s prospects, competitor valuations or similar M&A transactions that might serve as a reference point. This is more art than science though, and there are no hard and fast rules as to how much a business might ultimately be sold for. A good Board of Directors or Chairman can elicit far in advance of what you might have hoped for, but you can also be left disappointed by the price being offered. Regardless, we always engage around M&A bids and will vote on all deals.

Management do not always recommend a takeover of course. An interesting example was Pfizer’s attempt to acquire AstraZeneca back in 2014, with the latter arguing that the takeout price substantially undervalued AstraZeneca’s product pipeline. Pascal Soriot – who is still the CEO today – took a substantial risk and put his job on the line by arguing vociferously against the proposal and refusing to engage with the potential acquiror. He has ultimately been proven right with the share price having approximately doubled in seven years and now standing at a 60% premium to Pfizer’s final offer.

Bittersweet but fundamentally a vote of confidence

While a company being taken private usually brings a short-term boost to performance, the impact can be bittersweet. We look to invest in companies for the long term, so any takeover approach ultimately means we are losing a business which we believe can grow and compound its earnings over time. However, continually trying to identify the winners of tomorrow is one of the factors that makes our industry such a fascinating and rewarding challenge.

On a positive note, periods of high M&A activity typically coincide with a plethora of new opportunities coming to market with their initial public offerings. We have seen plenty of examples of this in 2021, such as with Moonpig or Darktrace, or even Wise in early July, London’s largest ever tech listing.

It is always encouraging to see a healthy level of M&A: it is effectively a vote in favour of equities.  From a valuation standpoint, UK equities are one of the last asset classes standing globally. When you take into account the UK’s economic fundamentals, growing business and consumer confidence, large consumer savings and improving sentiment, it adds up to a compelling case for domestic exposure.

Companies mentioned in this article are for informational purposes only and do not constitute a recommendation to buy or sell the securities in question.


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