The increasing pace of takeover bids for undervalued companies should help close the discount at which UK shares are trading at compared to other stock markets, say fund managers. In recent days, temporary power company Aggreko (AGK) has been circled by private equity groups with a consortium making a 40% premium bid for the FTSE 250 firm. Private jet services company Signature Aviation (SIG) is recommending shareholders accept a similarly chunky offer following a bidding war.
Meanwhile, a premium cash bid for Equiniti (EQN) was reported at the start of this week. Two weeks ago Scapa Group (SCPA), a popular holding among UK smaller companies funds, accepted a knockout bid from a US buyer, boosting the likes of the GBP1.5bn SDL UK Buffettology and GBP327m Tellworth UK Smaller Companies funds. UK stockpickers like Simon Gergel argue that flurry of mergers and acquisitions (M&A) activity signals the end of a half-decade when the domestic market has been out of favour due to Breit wrangling and latterly the economic toll of the coronavirus health crisis.
'I think we're now through that. People can look forward and investors can once again say the UK's investible. We're starting to see, anecdotally, a bit of interest coming back.
And we're also seeing a lot of takeovers,' he said. 'The discount of the UK I think will start to close one way or another. Either because money comes in and pushes up the valuations of UK companies or because many of them attract takeover interest, because they are in many cases really cheap assets compared to their global peers,' he added.
Gergel manages the GBP543m Merchants (MRCH) investment trust as well as the GBP69m Allianz UK Equity Income fund, where performance has won him a Citywire A-rating. The portfolios have benefited from the recent bid for Entain (ENT), the bookmaker formerly known as GCV which fended off an approach, as well as the bumper bid for RSA Insurance (RSA) late last year. Both are FTSE 100 stocks.
Janus Henderson manager Laura Foll said the M&A surge of the past three months triggered by November's 'vaccine rally' had vindicated her firm's view that there was a value opportunity in the UK. 'It has really been a UK market wide phenomenon with both small and large companies being approached by a combination of private equity and peers... Now that we've had the Brexit deal agreed, at least on goods, in my view, we could see that takeover interest really accelerate because there is that clarity over the trading environment.'
Along with James Henderson, she manages several funds including Lowland (LWI). The GBP312m trust also benefited from the RSA deal, while an approach from a US buyer for speciality chemicals firm Elementis (ELM) spurred a rally in its shares late last year. Other significant recent activity includes the tussle for bookie William Hill (WMH), where the parent of Las Vegas's Caesars Palace hotel and casino won out, and the ongoing bidding war for G4S (GFS).
The pub sector also received a boost last week after a bid for Marston's (MARS). While the coronavirus pandemic understandably crimped corporate activity last year, the volume of recent offers and deal suggests 2021 could see levels move back towards those in the buoyant year pre-pandemic. Over 2019, when the FTSE 250 enjoyed a strong run, the value of acquisitions reached 10.5% of mid-cap index's opening market capitalisation, according to data provided by broker Liberum.
The equivalent figure was 5.3% for the FTSE Small Cap index.
Last year, that fell to 0.4% and 3.2% of the indices respectively, suggesting the potential for built-up demand to come back with a bang.