Edinburgh-based investment group Aberdeen has warned that international and strategic buyers will continue to snap up undervalued London-listed firms — and that “sooner or later” the UK is going to run out of such companies.
“The good news is that strategic buyers continue to see significant value in UK plc,” said Aberdeen, “but at the same time, these very opportunities are seeing continued shrinkage in the UK’s stock market.
“The number of companies in the FTSE All Share is down 11% in the last five years, while there are nearly 300 fewer companies in the FTSE All Share and FTSE AIM All-Share combined compared to five years ago …
“According to Deutsche Numis, there have been 27 potential and confirmed takeover approaches for UK companies in the year-to-date, with a combined value of more than $70 billion.
“Momentum has accelerated in recent weeks, with nine approaches announced in the past month alone for companies including Segro, EasyJet and Rotork.”
Aberdeen Group manages and administers around £550 billion of client and customer assets across its three core businesses — interactive investor, Adviser and Investments.
Aberdeen said buyers of UK firms are also paying substantial premiums, with the average takeover premium reaching 39%.
“The surge in activity comes as overseas buyers increasingly step in to acquire businesses that many believe are trading below their intrinsic value,” said Aberdeen.
Rebecca Maclean, Investment Director – Developed Market Equities at Aberdeen Investments, said: “The UK’s valuation discount is not a secret. Strategic buyers and corporates recognise what public markets are overlooking: many UK-listed companies are high-quality global franchises that are trading at unjustifiably low valuations.
“Unsurprisingly, they are swooping in to secure those assets before the sale ends.
“Importantly, this is not just a search for cheap assets. Companies such as Rotork and Intertek illustrate the type of quality businesses that continue to appeal to acquirers.
“Public markets may have fallen out of love with dependable compounders, but strategic acquirers continue to recognise the value of businesses with durable competitive advantages, that generate strong cash flows, visible earnings, and returns comfortably above their cost of capital.
“So while the UK has some great stories tell, sooner or later we are going to run out of them. There’s plenty to do if we want deeper markets, and more engaged domestic investors, not least financial education. But the question, perhaps, is no longer whether we can afford to scrap stamp duty – it’s whether we can afford not to.”
Aberdeen said another notable theme is that many of the companies attracting interest are global businesses rather than domestic economic plays.
“Around 75% of FTSE All-Share revenues are generated overseas,” said Aberdeen.
“In effect, buyers are acquiring global franchises through a market that remains valued at a discount to international peers.
“That valuation gap is attracting particular attention from overseas buyers. Goldman Sachs analysis of European strategic M&A shows that US acquirers have concentrated a disproportionate share of their European acquisition spending in the UK.
“Far from being deterred by the UK’s macroeconomic environment, international buyers appear to view the market as one of the most attractive hunting grounds for quality assets.”