UK M&A – Further acceleration

Accelerating pace – 32 transactions were announced in 1H of >£100m, with the UK second globally behind the US by value.
Larger companies targeted – There are 17 ongoing bids for FTSE 350 companies, versus just 2 for the whole of last year. This trend reflects greater corporate appetite and confidence in the economic outlook. 
IPOs – The IPO market is ‘selectively open’, according to the Peel Hunt Speedometer, but action is required to refill the hopper. 
Action required – The pace and scale of de-equitisation is clear. It is essential that we address the demand side, such as through pension reform, UK ISA, removing stamp duty and establishing a wealth fund to ensure the health of the UK equity market.

 

Key themes:


Heightened activity – Bids announced YTD and still live amount to an equity value of £43bn. Including the bids announced last year and completed this year, and delistings from the UK, the total value is £95bn.

Going up the market cap – Of the 32 transactions announced in 1H, 17 were in the FTSE 350, 3 in the FTSE Smallcap and 10 on AIM. In the whole of FY23, there were 39 transactions announced, of which 2 were in the FTSE 350, 14 in the FTSE Smallcap and 19 on AIM.

Increase in pace – There has been an acceleration in both the number and scale of transactions over the last few quarters, with 2Q being the busiest period both by number (21) and value (£26.5bn). 

More corporate buyers – Last year, the majority (56%) of offers were from financial buyers. However, corporate buyers (72%) have dominated in 2024 as the rate environment and economic outlook have become clearer, demonstrating the value of UK companies.

Multiple offers – There have been 6 competitive situations YTD (Alpha, C&R, DS Smith, Hipgnosis, Spirent and Wincanton) and 8 raised offers.

High premiums – The average premium thus far in FY24 is 40%, with some offers materially higher than the undisturbed price (e.g., Wincanton +104%, Spirent +86%, IDS +73% and Keywords Studios +69%).

Overseas appetite – Overseas bidders are c.60% of the total YTD. 

Sector focus – Tech and Real Estate have been the most active sectors.

The ones that got away – 4 notable offers were rebuffed (Currys, Direct Line, Elementis and XP Power).

 

How to reverse the trend

We believe that the pace of M&A is likely to continue whilst fund outflows are relentless, as shown below.

Figure 1: 36 consecutive months of outflows (£bn)

Source: Calastone

 

This is data from Calastone, which shows 36 consecutive months and £22bn of total outflows from UK equity funds over the last 3 years. This shows a partial view of the underlying total, with Morningstar reporting even higher numbers. The latest data (May 2024) recorded the second-highest level of outflows at £1.1bn.
This really matters as it results in:

  • Low valuations, making M&A attractive for acquirors.
  • Shareholders more readily agreeing to offers, given their need for performance and liquidity.
  • Management teams questioning the rationale of being quoted. 
  • Boards being more likely to agree to an offer, thereby increasing the chances of deal completion.
  • Limited appetite for IPOs.
  • A recognition that scale is becoming increasingly important.

The scale of M&A, combined with share buybacks, is at least counteracting the level of withdrawals, which has resulted in an improved performance of UK equity markets in recent months. Furthermore, the IPO market has reopened with the recent listings of Raspberry Pi and Aoti. However, the scale of departures dwarfs the new entrants, and we are continuing to see the smaller company sector diminish rapidly.

The chart below shows the trend over the last 5 years. 

Figure 2: FTSE Smallcap x Investment Trusts

Source: Bloomberg, Peel Hunt estimates

 

The proforma number includes companies that are confirmed departures as well as those recently added to the index (either from no index inclusion or moving from AIM). This adds 10 companies to the proforma number of 105, which means that the underlying  pace of decline is materially greater than shown in the chart. The chart also shows the scale of reduction in market capitalisation of the FTSE Smallcap constituents, which of course impacts on investor attention given the reduction in allocations. As we have said before, if the underlying trend is extrapolated, the last company will leave the FTSE Smallcap in 2028.
The trend in the AIM market is not as extreme, but shows a similarly concerning drop. The chart below shows the number of companies reducing by 23% in just 5 years, with the market capitalisation of the index remaining static over the same period. This would have been considerably worse without the surge in 2021 IPOs, which investors perceived as a new paradigm post-Covid, a notion that has proved short-lived.

 

Figure 3: AIM number of companies and total market cap

Source: Bloomberg, Peel Hunt estimates

 

It is vital for UK economic growth that these trends are reversed. Smaller companies are the lifeblood of economic activity, and the equity market is a vital source of growth capital. Regulatory reform is well advanced and will improve the environment for listed companies, but fund inflows are fundamental to ensuring a healthy market for both listed companies and those intending to IPO. Increased fund flow could come from:

  • Increased UK allocation by pension funds and insurance companies. 
  • A UK ISA to encourage domestic investment by retail investors.
  • Removing stamp duty to ensure that the UK is competitive with the US, as well as reducing cost of ownership and improving liquidity.  
  • Developing a UK wealth fund, for instance through reinvesting the investment in NatWest. 
  • Attracting overseas investors if they perceive a material change in UK fund flows and greater political and economic stability.

 

Enacting all of these measures would require a small initial investment from the government but we anticipate would deliver a material long-term improvement in the UK equity market, economic growth and tax take.

 

UK M&A – An accelerating trend…

We show below the bid activity in 1H at over £100m equity value.

Figure 4: M&A with an equity value >£100m in 2024

 

 

 

Company

Offeror

Index

Sector

Equity value £bn

Payment

Announced

Initial premium

Updated premium

Belvoir Group

Property Franchise Group

AIM

Real Estate

0.1

Shares

10/01

10%

10%

LXI Reit

LondonMetric

 250

Real Estate

1.9

Shares

11/01

9%

9%

Wincanton

CEVA Logistics

 250

Transport

0.6

Cash

19/01

52%

104%

Redrow

Barratt Developments

 250

Builders

2.5

Shares

07/02

27%

27%

DS Smith

International Paper

 100

Packaging

5.7

Shares

08/02

33%

48%

UK Commercial Property REIT

Tritax Big Box REIT

 250

Real Estate

0.9

Shares

12/02

11%

11%

Spirent

Keysight

 250

Technology

1.2

Cash

05/03

61%

86%

Virgin Money

Nationwide

 250

Financials

2.9

Cash

07/03

38%

38%

Mattioli Woods

Pollen Street

AIM

Financials

0.4

Cash

08/03

34%

34%

Henderson Eurotrust

Henderson European Focus

Smallcap

Funds

0.3

Shares

14/03

na

na

Accrol

Navigator

AIM

Personal Care

0.1

Cash

22/03

12%

12%

Gresham Tech

STG

n/a

Technology

0.1

Cash

09/04

27%

27%

Lok'nStore

Shurgard

Aim

Real Estate

0.4

Cash

11/04

16%

16%

T Clarke

Regent Group

Fledgling

Support Services

0.1

Cash

16/04

28%

28%

IDS

EP Corp

250

Support Services

3.6

Cash

17/04

49%

73%

Hipgnosis

Blackstone

 250

Funds

1.1

Cash

18/04

32%

49%

Base Resources

Energy Fuels

AIM

Mining

0.2

Cash/shares

22/04

188%

188%

Tyman

Quanex

 250

Builders

0.8

Cash/shares

22/04

35%

41%

Darktrace

Thomas Bravo

 250

Technology

4.3

Cash

26/04

20%

20%

Alpha Financial

Bridgepoint

AIM

Support Services

0.6

Cash

02/05

51%

51%

John Wood

Sidara

 250

Support Services

1.4

Cash

08/05

39%

45%

IQGEO

KKR

AIM

Technology

0.3

Cash

14/05

19%

19%

Keywords Studios

EQT

AIM

Technology

2.0

Cash

20/05

73%

69%

Hargreaves Lansdown

ADIA, CVC, Nordic

250

Financials

5.4

Cash

23/05

30%

46%

Capital & Regional

Vukile/New River

Smallcap

Real Estate

0.1

Cash/shares

23/05

na

na

Redcentric

Wiit

AIM

Technology

0.3

n/a

24/05

na

na

Foresight Sust Forestry

Averon Park

Smallcap

Funds

0.2

Cash

29/05

33%

33%

Tritax Eurobox

Brookfield

250

Real Estate

0.5

Cash

04/06

na

na

Trident Royalties

Deterra

AIM

Mining

0.1

Cash

13/06

23%

23%

Crest Nicholson

Bellway

250

Builders

0.6

Shares

13/06

30%

30%

Britvic

Carlsberg

 250

Consumer

2.8

Cash

21/06

30%

30%

Witan

Alliance Trust

250

Funds

1.6

Shares

26/06

na

na

Total

 

32

 

43.1

 

 

35%

40%

Source: Company, Peel Hunt estimates

 

 

Key points to note are:
It has been particularly noticeable in recent months that corporates have been the main acquirors. This suggests to us greater confidence in the economic outlook and the interest rate environment. It also shows the attractiveness of UK companies and the potential for synergies in a low growth environment. 


It has been surprising to see relatively low activity from PE, given the c.US$4tn of dry powder currently available. We expect this to change as financing conditions improve, which means 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 scale of premium). In addition, the private markets are slower to adjust to tougher economic conditions, which means that acquisition multiples can be unrealistic in the private market.


Value – The total equity value of the bids amounts to £43bn. The split per index is shown below:

Figure 5: Value and percentage of total value per index

Value

Value £bn

% of market value

FTSE 100

5.7

0%

FTSE 250

32.1

9%

FTSE Smallcap ex Inv Trusts

0.4

1%

AIM

4.5

6%

 

Source: Peel Hunt estimates

This shows that companies representing 9% of the total value of the FTSE 250 are potentially leaving in just 6 months (note, we have included Hargreaves Lansdown in the FTSE 250 as it was promoted to the FTSE 100 post the bid).


Index – There are 16 bids progressing in the FTSE 250 currently as shown below (again including Hargreaves Lansdown as a FTSE 250 constituent for this analysis).

 

Figure 6: Number and percentage of departures per index

 

Number

% of index constituents

FTSE 100

1

1%

FTSE 250

16

6%

Smallcap ex Investment Trusts

3

1%

AIM

10

2%

 

Source: Peel Hunt estimates

 

The impact on the FTSE Smallcap is much greater than suggested by the data above, as a number of constituents will be promoted to the FTSE 250 to replace the companies being acquired. In addition, there are 2 REITS that are in wind-down.

Sector The Tech and Real Estate sectors has been the most active with 6 transactions as shown below.

Figure 7: Split by sector

Source: Peel Hunt estimates

Activity by quarter – There was a marked acceleration in activity towards the end of last year, which has continued into the first half of 2024.

Figure 8: Bid activity by quarter

 
 
Source: Peel Hunt estimates

Given the improving economic environment and a more accommodating lending market, it feels highly likely that the elevated rate of M&A will continue in 2H. 
Although there are tentative signs of the IPO market starting to emerge from hibernation, it is obvious that there are structural issues in the UK that need to be addressed to retain a healthy UK equity market, particularly for smaller companies. 
As discussed above, the demand side requires urgent attention by the new government if we are to retain our growth companies and to ensure that the equity market is able to provide long-term growth capital.