M&A - Accelerating UK bid activity

A classic indicator of a disconnect between short-term concerns and longer-term opportunity is when non-equity investors start to buy the assets.

This is clearly happening, with 10 bids for FTSE 250 companies progressing currently. This is unsurprising given the de-rating of the FTSE 250, with the overall index -18% YTD and 80% of the members down on the year. This has driven heightened interest from overseas and private buyers. There have been 14 proposed and announced bids in the past six weeks, adding up to £21bn of equity value. This should help to replenish cash positions for hard-pressed equity investors.

Bid activity accelerating
There have been 20 announced and possible bids so far this year with an equity value of £26bn (based on M&A activity with >£100m equity value). After a slow start to the year, there has been an acceleration in the past few weeks. This reflects lower valuations, greater potential for deal completion and the scale of
dry powder in private equity.

Focus on FTSE 250
The main activity has been in the FTSE 250 with 10 bids, compared to five in the FTSE SmallCap and four in the AIM. They are spread across Transport (four), Support Services and Real Estate (three each), Healthcare and Retail (two) and one each in Energy, Financials, Housebuilders, Media, Oil & Gas and Retail. There have been eight financial buyers, nine corporate, and three family. Looking at the location of the bidders, 11 are from overseas and nine are domestic.

The majority of the transactions are likely to complete, though some may fall away. For instance, FirstGroup, THG and Mediclinic have all rejected their respective bids. Countryside Properties has rejected its proposed offer, but has announced a formal sale process.

Themes to consider
The pace has clearly accelerated after a slow start. There is a clear focus on hard assets, with most of the businesses being acquired having strong market positions with clear and lasting cash flow credentials. The mix of financial and corporate buyers reflects the strength of balance sheets, access to funding, and the ability to look through a tough economic environment. Weaker sterling should also increase the appetite from overseas.

Increased cash for investors
The recent market malaise is driven by the worsening economic outlook, rapid escalation in inflation and rising interest rate expectations. This has been exacerbated by higher redemptions from equity funds, particularly those focused on the mid & small cap markets and growth orientated. Given the environment
and the redemptions, fund managers have chosen/needed to hold higher cash balances, resulting in them being net sellers of the market.

To view the full research note please click here