With valuations at an all-time low, a significant number of UK companies are expected to become targets for mergers and acquisitions (M&A) this year. This trend is fueled by the attractive pricing of the country's stocks.
According to an informal survey by Bloomberg News in March, which included 18 risk-arbitrage desks, traders, and analysts, British firms constituted 70% of entities mentioned at least twice as potential M&A targets. Noteworthy mentions included 888 Holdings Plc and Direct Line Insurance Group Plc, with Allfunds Group Plc receiving the highest number of mentions.
The FTSE 350 Index is currently trading at a 45% discount compared to the MSCI World Index based on the enterprise value to earnings ratio, a key metric for M&A valuation. This significant discount has made UK stocks highly attractive to investors, signaling the UK market as a prime candidate for a takeover wave amidst declining business confidence and challenging financing conditions.
Smaller companies, in particular, have caught the attention of investors due to their substantial decrease in valuations amid continuous outflows from UK equity funds. According to Ken Wotton of Gresham House Plc, this has attracted interest from both private equity firms and strategic corporate buyers, leading to a consistent flow of takeover bids and, in some instances, public bidding wars.
This year has already seen 14 takeover offers for UK firms with a market capitalization of at least £100 million, including notable transactions such as Nationwide Building Society's acquisition of Virgin Money UK Plc for £2.9 billion, and discussions between International Paper Co. and DS Smith Plc. Redrow Plc has also been in the news for acquiring Barratt Developments Plc.
Allfunds has been under the spotlight as its shares have dipped 43% below its 2021 IPO price, making it a potential target for acquisition. Since 2020, over 20 IPOs in Europe that raised more than $100 million each have seen M&A interest, as per Bloomberg data.
Covestro, a German chemical manufacturer, was another company frequently mentioned. Reports in February suggested ongoing discussions between Covestro and Abu Dhabi National Oil Co., although no agreement has been finalized yet.
Optimism remains high for an uptick in M&A activities in Europe this year, buoyed by improving conditions, easing monetary policies, and the eagerness of global private equity firms to invest. So far, nearly $43 billion in deals targeting European companies have been either pending or completed this year, with the UK making up about $17 billion or 40% of that total.
BNP Paribas SA's George Holst anticipates a busy quarter for M&A in Europe, highlighting the second quarter as a critical period for deal-making before the US election season begins to dominate the latter part of the year.
