This year’s unprecedented private equity buying spree in Britain is causing unease among politicians, trade unions and investors, about potential job losses and rising debt.
But generous price premia are also raising asset managers’ expectations of higher share prices for the London stock market after years of underperformance.
An $9.5 billion bid underway by Fortress Investment Group for British grocery chain Morrisons (MRW.L) is just one such private equity acquisition, which, according to Lazard Asset Management, have accounted for 85% of British take-private deals this year.
Here are five charts showing private equity’s hunt for UK-listed corporates.
Buyout groups spent $45 billion snapping up companies in Britain in the first half of 2021, Refinitiv data shows, more than double the next best first six months on record and almost 10% of the total $547 billion they spent across the world.
Peel Hunt data in July showed 38 London-listed companies had either been acquired by private equity this year or were in the process of being acquired. Apart from Morrisons, these include Dubilier & Rice and KKR’s acquisition of infrastructure firm John Laing Group (JLG.L).
The deals keep coming with Advent-owned defence firm Cobham agreeing on Monday a $3.6 billion takeover of Ultra Electronics (ULE.L), while CVC and London-listed Stock Spirits (STCK.L) announced a roughly $1 billion deal late last week.
Grace Peters, EMEA head of investment strategy at JPMorgan Private Bank called private equity interest in UK companies “comforting”, saying that when you invest in equities “you want to know there is an incremental buyer”.
2/FOR SALE, CHEAP COMPANIES
The attraction for cash-rich private equity is obvious.
While U.S. (.SPX) and European (.STOXX) stock indexes have gained 65% and 25% respectively since August 2018, the FTSE 100 index is down 8% and trading at just 12.6 times forward earnings. That compares to 21 times and 16.3 times respectively for the U.S. and European benchmarks.
British stocks’ discount to global peers is the deepest in over three decades.
Brexit is one reason. The mining, energy and banking shares typical of the FTSE 100 have cheaper valuations than tech as their performance hinges on a clearly positive growth outlook.
But even smaller, domestically focused British stocks (.FTLC), trading at 13.2 times forward earnings, lag the U.S. midcap (.IDX) average of 17.6 times.
Janus Henderson portfolio manager Tom O’Hara says UK valuations are often unjustifiably cheap even when companies are hugely cash-generative.
“UK for sale is very much an ongoing theme and it will remain so until the market becomes a lot better valued,” he said. “If the market refuses to value a company appropriately, private equity will come and take it off your hands on the cheap.”
3/NOT THAT CHEAP?
Shareholders in Morrisons will reap a 40%-plus premium should its buyout proceed at 270 pence per share – in line with the average premium offered this year by private equity firms, Peel Hunt analysis shows.
4/PUBLIC TO PRIVATE
The laws of supply and demand dictate that take-private deals will support share prices by removing equity from the market, even if the amount withdrawn is dwarfed by the 2.4 trillion-pound FTSE 350 index.
Companies taken private from January to July represented 11 billion pounds in market cap, Peel Hunt estimates. That will rise to more than 26 billion pounds and remove almost 13 billion shares from the public market if all the deals announced in the period complete.
“There’s a lot of money coming back in for fund managers to deploy, and a lot of that will be repositioned in companies currently listed in the UK or provide firepower for fundraising for IPOs,” said Charles Hall, Peel Hunt’s head of research.
There is unease too. Kiran Ganesh, London-based head of multi-asset at UBS Global Wealth Management, cautioned that policymakers need to ensure “the best opportunities don’t go private and public markets are just what’s left over”.
Buyouts are creating what Justin Onuekwusi, portfolio manager at Legal & General Investment Management, calls arbitrage opportunities between public and private markets as investors jostle for shares in potential takeover targets.
“Allocating to the cheaper asset classes will eventually pay off if you’re willing to be patient,” he told the Reuters Global Markets forum.
The Morrisons deal has lifted shares in rivals Sainsbury’s and Tesco, while Berenberg analysts have a Buy rating on listed real estate companies Capital & Counties (CAPCC.L), Helical (HLCL.L) and Grainger (GRI.L) as it considers them attractive to private equity buyers.
Janus Henderson’s O’Hara holds several companies with valuations he reckons make them attractive takeover targets, including Premier Inns operator Whitbread (WTB.L), Sainsbury’s (SBRY.L), chemicals firm Johnson Mathey (JMAT.L) and DIY firm Kingfisher (KGF.L).
“It’s a simple case of financial arbitrage being left open by the market,” he said.