Private equity firms eye valuation gap as City falls to takeovers

The London Stock Exchange has seen a sharp uptick in takeover premiums this year as a deals spree from led by private equity firms and foreign buyers accelerates.

The average price paid by acquirers relative to companies’ share prices has hit 45 per cent, according to data from AJ Bell. Foreign buyers account for 86 per cent of total deal value, with US buyers representing half of all overseas approaches.

Insurer Beazley was poached by Zurich for £8.1bn at a 59.8 per cent premium, while Nuveen swept up Schroders for £9.9bn, at a 34 per cent premium. On Thursday, three listed businesses agreed to takeover deals, including engineering firm Rotork, which was bought by Swiss rival ABB for £4.1bn at a 73 per cent premium.

The mid-market has also been caught up in the wave of deals. FTSE 250 budget airline Easyjet agreed in principle to a £5.7bn takeover bid from Apollo, placing it at an 81 per cent premium.

The deals, combined with a dearth of IPOs, are shrinking London’s stock market.

Since 2023, there have been 154 bids for UK companies with a market value of more than £100m, erasing around £165bn of stock market capitalisation, according to Peel Hunt. In contrast, there have been just 11 listings in London by companies surpassing £100m, adding total value of £6bn.

Fund managers have pinned the market’s lopsided nature on buyers seeking to take advantage of the valuation gap between the UK and global competitors and hunting for discounted offers. 

Segro rejected a £12.6bn bid from US real estate firm Prologis, arguing it was “opportunistically timed”, while testing company Intertek rejected three bids from Swedish firm EQT, arguing they undervalued the group, before accepting a £10.6bn offer.

Michael Field, chief European equity analyst at Morningstar, said: “It’s not that the UK is a market where everything is getting taken over. It’s that activity is very strategic and very specific.

“Certain targets with depressed valuations… are at the mercy of larger companies that see now as the time to swallow them up and bring down their own cost base.”

Field anticipates this M&A trend will continue “unless something drastic changes in the UK”.

Dan Coatsworth, head of markets at AJ Bell, said: “The ongoing takeover trend in general is bad for investors because it is reducing choice.”

Steven Fine, chief executive officer of Peel Hunt, called for the government to do more to stop the trend as it “weakens the UK’s tax base and growth prospects”.

Writing on LinkedIn, Fine said: “The equity market is a strategic national asset. When companies list elsewhere or are acquired and disappear from the market, the impact extends far beyond stamp duty. 

“We lose tax revenues generated by advisers, lawyers, bankers, auditors and head-office employees. Pension savings are increasingly invested overseas, supporting growth in other economies rather than our own,” Fine added.

“It is a slow leak across multiple channels.”