Over the past 3 years, the M&A environment for UK listed companies has moved through periods of elevated and muted activity as strategic and private equity buyers have become more or less active at different times. Underlying this, a persistent sense that the UK is structurally undervalued and that UK listed companies are ‘always for sale’ (as compared with private companies that need to be actively sold) has supported the supply side of the equation. Now, however, we observe a wave of demand approaching the shores of the UK – with strategic and private equity buyers simultaneously active – and our coastal defences feel weaker than ever. To access the full report, email peelhuntm&[email protected]
On the demand side, the uncertainty of US and UK elections, as well as the UK budget, are behind us; boards and investment committees have ostensibly priced in the known risks of geopolitical instability in Europe and the Middle East; and, while interest rate cuts have been sluggish, the direction of travel is intact, underpinning the availability and pricing of acquisition financing. All this together means that buyers are ready to make investment decisions – and major ones at that.
On the supply side, the headwinds facing the UK equity markets now represent daily news as commentators from all quarters seek to diagnose the issues accurately, identify potential solutions and lobby key decision-makers. This is a valuable debate but inevitably it serves to highlight the vulnerability of UK listed companies to a global audience, and potential acquirers have no incentive to wait for its conclusion. Approaches to UK listed companies are now coming at an increased rate with those that become public knowledge far outweighed by those that are yet to (or may never) see the light of day. We see this trend only accelerating in the new year, absent an unexpected change in circumstances. Over 2024, 1 in 20 of all UK listed companies have been put under offer publicly - the highest level we have observed in recent years.
In addition to unsolicited approaches from potential bidders, we hear increasingly from UK boards who are seeking to explore their strategic options and assess the feasibility of a sale process. The option to run a private sale process under revised Takeover Code rules has made this a more palatable option for many boards. For smaller companies, low share liquidity, a share price that barely responds to positive news (but overreacts to negative news), and a perceived structural dislocation of the share price from fundamental value all call into question the merits of being listed. The exodus of capital from UK equity funds and the reduction of tax incentives to invest in AIM only serve to whip up the headwinds facing the UK small and mid-cap segment.
There are pockets of resistance, however. We have seen some (but not all) UK plc boards prepared to defend vigorously against bidders that are not prepared to deliver fair value to exiting shareholders. Going ‘fully hostile’ is still a step too far for nearly all bidders, so aggressive public bear hugs that do not ultimately bring the target board to the table tend to result in bidders withdrawing. UK plc shareholders provide the second and last line of defence and some institutions have taken it on themselves to become staunch defenders against UK plc being sold ‘on the cheap’. This is a noble exercise, which often drives a bidder to offer improved terms, but a quieter (larger?) constituency of institutions remain who welcome the cash inflows from takeovers, either to fund their own liquidity requirements or because it provides the opportunity to redeploy the capital into higher quality investments.
Absent a change of events, it seems certain that 2025 will bring a major and sustained flow of UK takeovers. Bid defence manuals are no longer an item to be left on the shelf, ready to grab if needed. They ought to be front of mind for all UK boards, accompanied by an action plan to stay tightly aligned with key shareholders and a robust, up-to-date assessment of fair value, as well as a clear understanding of how to respond when the doorbell rings as, for many, it surely will.
To access the full report, email peelhuntm&[email protected]
