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Takeover bargains turn UK into hotbed of pandemic deal-making

Bloomberg / London

Investors are tracking a number of undervalued UK companies, including household names in gambling, energy and fashion, as some of the world’s lowest equity valuations raise the prospect of a new round of takeover deals in the fi…

Bloomberg / London Investors are tracking a number of undervalued UK companies, including household names in gambling, energy and fashion, as some of the world's lowest equity valuations raise the prospect of a new round of takeover deals in the final months of 2021.
A survey of 15 risk-arbitrage desks, fund managers, traders and analysts across the UK and Europe revealed that sports-betting firm Entain Plc, Scottish energy provider SSE Plc and luxury-clothing brand Burberry Group Plc are flashing brightest on investor radars.
The precision-engineering company IMI Plc, publisher Informa Plc and Spire Healthcare Group Plc were also tipped as takeover targets by the respondents, who were polled informally by Bloomberg News from August 24 to August 31.
The breadth and quantity of the names reinforces a long-held impression that UK businesses are cheap in comparison to European and US firms, and that there are bargains to be had if the British economy can move on swiftly from Covid-19 and Brexit. Low valuations, coupled with cheap financing and a favourable regulatory backdrop, are turning the country into a hotbed of global dealmaking.
This year is already close to being the strongest for mergers and acquisitions activity in the UK since a bumper 2015, with £229bn of deals completed and four more months remaining, according to data compiled by Bloomberg.

Ultra Electronics Holdings Plc, Avast Plc, Meggitt Plc, Wm Morrison Supermarkets and Sanne Group Plc have all received bids in recent weeks.
Potential buyers "are continuing to scour a long-undervalued universe of UK-listed entities where, despite the easing of Brexit and pandemic uncertainties, market dislocation persists," said Josh Rosen, a London-based analyst at UFP who covers event-driven situations in Europe.
"We expect a further wave of inbound M&A as a combination of pent-up demand and years' worth of would-be transactions work their way through the turning cogs of the equity markets."
The reason for the interest is clear. The valuation gap between the UK and other major markets has increased, as shown by the Ebitda multiple of the MSCI UK Index, a metric commonly used to value M&A targets.
The UK stock market is now trading at a 50% discount relative to the US compared with about 11% five years ago. "The UK in particular seems to have an awful lot of companies that are very well-run and over the long term have good returns, but are generally quite often under-appreciated," said Toby Clothier, head of global thematics and strategy at Mirabaud Securities in London. Cyclical stocks, in particular, trade at "very, very low multiples," Clothier said.
The notion that some companies and industries will benefit more than others in Britain's post-Brexit, post-pandemic environment has put the focus on names in the industrial and consumer sectors.
Brewer Marston's Plc and supermarket chain J Sainsbury Plc were name-checked as potential targets, while Entain - which owns brands such as Bwin, Coral, Ladbrokes, PartyPoker, and Sportingbet - appeared on the watch-list of nine of the 15 desks polled by Bloomberg.

The company is already said to be a target for MGM Resorts International. Beyond Entain, the valuation of consumer and industrial stocks relative to the market has increased because of deal activity and speculation. UK industrial shares are now 70% more expensive than the MSCI UK's valuation multiples, a rise from 40% over the past six months.

Meanwhile, consumer stocks saw their valuation premium expand from about 20% to 40% over the same period.
Caroline Simmons, UK chief investment officer at UBS Global Wealth Management, agrees that the UK is undervalued, but says the overall picture is more complex. "The UK does trade more cheaply than Europe, and it does trade more cheaply than its historical discount," she said.
Still, Simmons says bidders are looking to target class-leading companies as well as those ripe for a strategic overhaul. While some of those are small and affordable, Britain's industrial sector is trading more expensively than its international counterparts, Simmons notes.
On the regulatory front, the UK appears to be more flexible than other major European nations. Wm Morrison's takeover by a buyout firm has gone ahead without triggering government intervention, while France vetoed Carrefour SA's merger with Couche-Tard.

Nevertheless, Ultra's takeover by Advent International Corp. will be probed by the UK on national security grounds.
Mirabaud's Clothier predicts "at least one notable deal a week on average" during the rest of 2021. "All things infrastructure, property, and then things that are depressed and cyclical but recovering," he said.