Private equity companies are hunting in the UK market this summer, looking to buy up British firms on the cheap.
Their business model is to take on undervalued companies, grow them – and then sell or float them on the stock market.
Like scattered antelopes on the savannah, Britain’s best businesses look like easy targets – and barely a week goes by without news of a takeover bid.
Financial publisher Euromoney received a £1.6billion approach from firms based in Luxembourg and the UK last week. Transport giants First Group and Go Ahead have also received bids.
Taking aim: Like scattered antelopes on the savannah, Britain’s best businesses look like easy targets
Although some of the megadeals mooted earlier this year are looking less likely over concerns for the economy, rumours abound of private equity companies circling a number of the UK’s valuable mid-sized businesses.
But what does it mean if a private equity company makes a bid for a business in which you hold shares? And could you make money from buying shares in firms that look likely to be bought for a generous sum?
Why UK companies are tempting buyers
Darius McDermott, managing director of investment fund scrutineer Chelsea Financial Services, believes many excellent UK companies are effectively ‘on sale’ and therefore are enticing to buyers looking for a bargain.
That is because the pound is weak – down more than nine per cent against the dollar this year – which means companies valued in pounds suddenly look tempting to buyers with dollars or euros to spend.
Many of the biggest private equity buyers are based in the US – and now have additional firepower at their disposal thanks to the currency savings.
Additionally, the UK stock market is down overall, having fallen nearly six per cent so far this year. Some investors believe that not all those falls are justified and that some solid UK companies have been dragged down simply on negative sentiment.
Again – bargains to be had. McDermott explains: ‘There are a number of smaller companies that are leaders in their niche industries, as well as some large multinationals which choose to be based in the UK because of the advantages of our ‘central’ time zone, strong governance rules, access to capital markets and strong rule of law.
Some small and medium-sized companies were already looking cheap in comparison to their overseas peers. The recent share price falls have compounded this, leaving some UK companies vulnerable to takeovers
‘Now these companies are effectively on sale, private equity firms are taking advantage.’
Laura Foll, portfolio manager of Henderson Opportunities Trust and Lowland Investment Company, says that small and medium-sized companies look particularly cheap due to recent share price falls.
‘Some small and medium-sized companies were already looking cheap in comparison to their overseas peers,’ she says. ‘The recent share price falls have compounded this, leaving some UK companies vulnerable to takeovers.’
Richard Hunter, head of markets at wealth platform Interactive Investor, adds that a number of private equity companies have built up ‘an arsenal of cash which is waiting to be deployed’ and the UK currently looks like a great place to go spending.
What happens if you are a shareholder?
If you’re a shareholder in one of the companies that has received approaches of late, you might view the circling private equity firms as a blessing, or as a curse. The private equity company will generally come to shareholders with a takeover offer.
This tends to be at a premium to the current share price – in other words higher than the company’s stock market value.
As a result, shares will often jump in price on news of a takeover bid. Sometimes the share price will even rise on rumours before an approach is officially announced.
Spike: Shares often jump in price on news of a takeover bid – and sometimes before it is even announced
On the face of it, this is great for shareholders. Some may even choose to cash in and bank any profit they have made.
However, it is not always good news. Let’s say you are holding shares in a company because you believe in its future and trust that you will be rewarded with a growing share price and dividends over the years.
If the offer made does not reflect this long-term potential, it can be very disappointing for shareholders.
How will the takeover process roll out?
The process of a takeover can be uncertain and fraught with danger, since not all bids succeed.
Shareholders can vote against a takeover deal if they wish, as can the management of the company. There can be to-ing and fro-ing before a final price is agreed.
Russ Mould, investment director at wealth manager AJ Bell, says: ‘Both can hold out for a higher price, which is what Euromoney’s board seems to be doing.’
In some cases, multiple companies can find themselves bidding for a business, which pushes up the price.
But beware, as deals can also collapse at the last minute, due to legal snags or if regulators decide that they are anti-competitive. When this happens, shareholders can lose out.
You can have a say in what happens next
If you hold shares directly through an online provider or broker you can vote on whether or not a takeover bid should go ahead.
As a small shareholder you may feel you have little choice, but the managers of funds with large stakes in businesses will hopefully have the interest of smaller shareholders at heart when rejecting or accepting a bid, and your collective views do have weight.
If you hold shares through a fund, the fund itself has the voting rights. That means you cannot vote, but instead have to hope that the fund manager makes the best decision on your behalf.
If a takeover does go ahead, you could receive payment in cash, or in shares from the purchasing company, or a mixture of both.
In the case of most private equity deals, you will receive cash, and your association with the company will end.
Targets: UK businesses being touted as potential takeover prospects by private equity firms include Deliveroo, Ted Baker and Asos
Should I chase firms that look like targets?
Because the share price of a company often rises when it becomes the target of a takeover it can be tempting to seek out the next big target to make some quick money.
Many UK businesses have been touted as potential targets, including Deliveroo, Ted Baker, Asos, Fever-Tree, Marks & Spencer and Pearson.
However, Hunter at Interactive Investor says there is currently no evidence to support any of this speculation. In any case, experts warn that those who chase takeovers usually fail.
‘Buying stocks in the hope of a takeover is a mug’s game,’ says Mould, at AJ Bell.
‘Only choose individual stocks or funds, be they active or passive, if they fit with your overall strategy, target returns, time horizon and appetite for risk. Do not deviate from that looking for a fast buck from a bid.’
Can you still benefit from the takeover?
Instead of trying to pick up possible prey, John Moore, senior investment manager at Brewin Dolphin, suggests looking to investment trusts or funds that might benefit from a wider trend towards UK takeovers.
He points to Odyssean Investment Trust, which has benefited from a number of takeover approaches for the stocks it holds – including companies such as RWS, Spire, Vectura, Clinigen and Euromoney. It is up 57 per cent over three years.
‘Aberforth Smaller Companies Trust, BlackRock Throgmorton Trust and Mercantile Investment Trust, are also typical hunting grounds for those hoping to hone in on takeover targets,’ he adds. Another option is to buy into the private equity firms themselves, especially if you think they are getting a good deal on UK bargains.
Annabel Brodie-Smith, at the Association of Investment Companies, points out that the average trust invested in private equity is up 504 per cent over ten years.
‘Many analysts believe that private equity investment companies currently offer a buying opportunity for brave bargain hunters who are prepared to hold for the longterm,’ she says.
Hunter, at Interactive Investor, suggests looking at Abrdn Private Equity Opportunities or F&C Investment Trust which has about 10 per cent of its assets in private equity. These trusts are up 54 per cent and 21 per cent per cent over three years respectively.
A sad decline… or a silver lining?
Many feel that this summer’s picking-off of prime UK businesses is a sad state of affairs for the country in the long term.
McDermott fears we are allowing ‘our best and brightest companies to be bought out for a quick buck today at the expense of future returns’.
For battered investors, though, there is a silver lining, as at least they are getting some cash now.
‘These moves are a reminder to think of price declines as an opportunity, rather than something to dread, which is a feeling that tough markets will sometimes induce,’ says Moore.
Takeovers validate the fact that the UK is a market worth considering, it has attractive valuations. This kind of activity is also likely to bring others to the table which should generally increase interest, liquidity and valuations over time.’
Depending on where you sit in the food chain, the law of the jungle can be a hard one to stomach, but interest in UK businesses reminds us it is still worth being part of this Circle of Life.
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