The U.K. market continues to be attractive to U.S. private equity and activist investors. This is partly because the British Pound is trading quite cheaply compared to the U.S. Dollar. This may also be because many companies are not being run in the most efficient way in the U.K. and seem ripe for a change of strategy to unlock value.
The highest profile activist campaigns we are currently seeing are Elliott Management in GlaxoSmithKline (GSK, Financial) and SSE plc (LSE:SSE, Financial) and Third Point in Royal Dutch Shell (LSE:RDSB, Financial).
Another company I think is ripe for an activest campaign, or indeed potentially a private equity bid, is FTSE 100 constituent Associated British Foods PLC (LSE:ABF, Financial). The stock looks cheap and does not reflect improving revenues and the potential for surplus cash returns.
Additionally, Associated British Foods is still being run as a conglomerate. Its food business owns Twinings tea and Ovaltine drinks, but the company is more famous for its retail brand, Primark. Primark itself is a well run business that focuses on low prices for clothing. Like its clothes, the company’s stock is cheap, trading on a forward price-earnings ratio of 12. The GuruFocus Value chart suggests the stock is modestly undervalued, and the stock has a very respectable Piotroski F-Score of 7 out of 9. Additionally, the financial risk is low with an Altman Z-Score of 3.3.
The financial risk is low in part because the company is sitting on a high amount of cash thanks to its high free cash flow returns. In September, Associated British Foods' net cash was 1.9 billion Pounds ($2.5 billion).
Management has stated it wishes to return some of this surplus cash to shareholders and that has started with a special dividend of 13.8 pence a share, in addition to a final dividend of 20.5 pence. A resolution for permission to initiate a share buyback program will be voted on at the annual general meeting on Dec. 10, 2021.
This may be why the Yacktman Focused Fund (Trades, Portfolio) has been accumulating the stock recently (though of course, this is just speculation on my part). Yacktman’s strategy is a combination of value and growth. Associated British Foods' growth should come from plans to open more than 100 stores in Italy, Iberia, France and the United States over the next five years. Based on the full fiscal 2021 results which were just recently announced, the company is also growing in the smaller Sugar, Ingredients and Agriculture segments.
Last year, about 600,000 square feet of new store space was added, and this year that number will be around 500,000 sq ft. But plans to grow stores from 398 to 530 over the next five years should mean over a million square feet of space being added in total.
Some critics think that Primark is behind the curve with a lack of an e-commerce presence, but I see it as a focused strategy that helps margins. Going into a store, it's easier (especially with Primark’s low prices) to come out with more than you had initially intended to buy.
Inflation remains a risk. Higher corn oil prices led adjusted profits for the food business (41% of group total) to be 5% lower than last year. Buying most supplies in U.S. dollars means the devaluation of the Sterling against the dollar, which should help both the food and retail segments absorb higher wage and supply chain costs.
I think an activist could easily come in and push for a split into two businesses, as I can’t see too much synergy between the food and retail businesses. Additionally, if private equity could convince the Weston family, which owns 55% of the company, to sell, it should be a straightforward acquisition, and the strong Altman Z-Score along with steady cash flows makes it a prime candidate for a leveraged buyout. For these reasons, the stock is firmly on my watchlist.
