UK PLC In Play?
UK PLC In Play?
Update on WG and some other UK-listed Model Portfolio names that fit the current UK takeover theme.
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“The UK has become structurally very attractive for M&A,” said Luck. “There’s a lot of frustration behind the scenes with valuations and the sense that the market is not properly rewarding UK companies.”
Takeover interest in UK companies hits highest since 2018, Financial Times, 12 May 2024.
“… knockdown share prices are piquing the interest of these groups’ foreign rivals or private equity buyers, making it a risky business to bet on share price declines… The numbers [valuations] are just so low in the vast majority of cases that a $2bn UK company is peanuts for any mid-sized American company.”
Hedge fund short sellers burnt by flurry of UK takeover bids, Financial Times, 4 June 2024.
I believe the increasingly frequent news reports of takeover bids for UK-listed companies are evidence of my long-held view that “UK Plc” is in play, with a diverse range of UK stocks subject to live takeover interest and/or fitting the profile of likely takeover candidates.
The UK public equity market currently offers a wide range of attractive “real” businesses (that is relating to tangible assets and essential services, as opposed to over-hyped or speculative tech stocks) that are cheap in both relative and absolute terms, trading at objectively low multiples compared to US comparables and to their historic average /through-the-cycle multiples. This has made many UK stocks obvious takeover candidates for both private equity and strategic acquirers as the opening quotes from the FT above allude to.
Of particular relevance here is the fact that the private capital industry currently sits on a record ~$3.9 trillion of dry powder, of which ~$1.2 trillion is in buy-out funds:
Source: Bain & Co, Private Equity Outlook 2024.
Furthermore, within the private capital complex these buy-out funds are further supported by almost ~$500 billion of dry powder in private credit, which has mitigated some of the recent caution across the high yield bond and leveraged loan markets in funding M&A amid inflation and interest rate uncertainty.
In simple terms, I believe this combination of well-funded, highly incentivised private acquirers and cheap, out-of-favour UK-listed companies constitutes a thematic value catalyst for UK equities, which is now starting to play out as recent news headlines indicate. Against this backdrop, paid subscribers to this newsletter will be aware that I currently hold a number of names in the Value Situations Model Portfolio that fit within this theme.
Given this intriguing environment for UK equities, I thought I would share some updated thoughts on relevant Portfolio names that I believe offer compelling prospective returns from here, starting off with Wood Group Plc (WG).
WG - From “Wooden Spoon” to Prized Asset
Following its recent Q1 trading update and last week’s news that Dubai-based Sidara had made a fourth (and final) bid to acquire WG, the stock continues to be both a fundamental turnaround/inflection story and a live takeover target.