Active 1Q – There was an increase in UK M&A activity in 1Q, with 15 companies in ongoing bid situations.
Not refilling the hopper – The UK Small & Midcap market continues to be depleted at a concerning rate, particularly given the lack of IPO activity (zero in 1Q at over £10om market cap).
Bid premiums – The average premium is currently 36% vs the undisturbed price, which is in line with historic norms.
The UK continues to be a happy hunting ground for both corporate and PE bidders, due to low valuations and willing sellers. We believe it is essential that the government urgently address the importance of UK capital to support UK companies.
Key themes:
- Depleting market. The scale of M&A and lack of IPOs is resulting in a material reduction in the number of UK-listed growth companies. We believe it is essential that action is taken to ensure the health of the ecosystem and enable companies to grow, scale and stay in the UK.
- 1Q activity. A total of 15 bids valued at over £100m market cap have been announced YTD and are still live, with an equity value of £9bn. This compares to 45 bids in FY24, with a total value of £52bn (of which £10bn are set to depart during 2025). The IPO market remains very quiet, with no IPOs of over £100m market cap in 1Q and only three in the whole of FY24.
- Small & Midcap focus. Of the 15 transactions announced YTD, there were six in the FTSE 250, four in the FTSE Smallcap and four on AIM. We have yet to see an offer for a FTSE 100 company in 2025.
- Corporate weighting. The bidders have been split 70% corporates and 30% financial buyers.
- Overseas appetite. Overseas bidders represent 47% of the total YTD.
- Sector focus. Funds, Real Estate and Healthcare have all seen three bid approaches. A key theme in both Funds and Real Estate is a focus on increasing scale in order to increase relevance to a broader range of investors.
UK M&A: an accelerating trend
Figure 1 below shows the bid activity YTD at over £100m equity value.
Figure 1: Bids with a market value of >£100m in 1Q25
Source: Peel Hunt estimates
Note: * represents situations where Peel Hunt has a corporate involvement. #Corporate client of Peel Hunt
Key points to note are:
It is notable that corporates have been the main acquirors, with 70% of transactions YTD and 60% in FY24. This shows the attractiveness of UK companies and suggests confidence in the economic outlook and the interest rate environment.
It has been surprising to see relatively low activity from private equity, given the scale of dry powder currently available. We expect this to change as financing conditions improve, meaning that PE is likely to be a more active acquiror going forwards.
Currently there are willing buyers (attracted by the valuations available and the probability of a successful conclusion) and willing sellers (due to fund outflows and the scale of premia).
Value: the total equity value of the bids amounts to £9bn. Figure two below shows the split per index:
Figure 2: Value and % of total value per index
Source: Peel Hunt estimates
There has been bids for £5.4bn of market cap in the FTSE250 and £3.2bn in the FTSE Smallcap and AIM. We discuss below the scale of departures from the FTSE Smallcap and AIM which should concern anyone that care about the health of the equity capital markets.
Index: There have been bids for £5.4bn of market cap in the FTSE 250 and £3.2bn in the FTSE Smallcap and AIM. We discuss below the scale of departures from the FTSE Smallcap and AIM, which should concern anyone that cares about the health of the equity capital markets.
Figure 3: Number of deals and % of companies per index
Source: Peel Hunt estimates
The impact on the FTSE Smallcap is much greater than suggested by the data above, as a number of constituents are set to be promoted to the FTSE 250 to replace the companies being acquired.
Sector: the most active sectors have been Funds, Real Estate and Healthcare.
Figure 4: Activity split by sector
Source: Peel Hunt estimates
Activity by quarter: the number of bids is higher than in 1Q24, with the value in the comparative quarter higher due to the offer for DS Smith.
Figure 5: Bid activity by quarter
Source: Peel Hunt estimates
Although there is considerable macro uncertainty, we expect the pace of M&A will continue to be at heightened levels.
Capital concerns
The scale of M&A is partly due to the volume of outflows from UK equity funds, which has resulted in depressed valuations and enhanced the prospects for deal completion given that many funds need to raise capital and are attracted by the premia available. Figure 6 shows the consistency and scale of outflows.
Figure 6: UK Equity fund flow (£m)
Source: Calastone
There have been outflows for 44 of the last 45 months, with the sole inflow reflecting budget changes to tax that were not as onerous as feared.
It seems obvious that there are structural issues in the UK that need to be addressed to retain a healthy UK equity market, particularly for Small & Midcap companies. The UK needs to address the demand side if it is to retain its growth companies and to ensure that the equity market is able to provide long-term growth capital. This can be delivered through pension reform, ISA reform, establishing a national wealth fund, and addressing stamp duty.
Figure 7 shows the trend in the number of companies listed in the FTSE Smallcap (ex Investment Trusts).
Figure 7: Number and market cap of companies in the FTSE Smallcap, ex Investment Trusts
Source: LSE, Peel Hunt estimates
There were 160 companies in the index in 2018, with a market cap of close to £50bn – by the end of 2024 that had reduced to 102 and £26bn. This really matters, as the reduction in market cap inevitably reduces capital allocation to smaller companies, which is part of the reason for the limited demand and the lack of capital to support fundraisings and IPOs.
The numbers would be looking even worse in 2025 were it not for the number of companies moving from AIM (currently eight have moved, announced an intention or are considering moving).
Figure 8 shows the trends in AIM
Figure 8: Number and market cap of companies on AIM
Source: LSE, Peel Hunt estimates
The number of companies listed on AIM has reduced 36% since 2018, and the market cap has fallen 60% since the peak in 2021. The rate of departure has accelerated in the current year, with 44 companies already considering leaving. Of these, 16 are due to M&A, eight are moving to the main market, and 20 are delisting. AIM has been a very successful growth market, has supported the growth of a large number of companies, and there are still a large number of highly successful companies listed. However, it seems abundantly clear that it needs a proper reboot.
