Private equity firms eye valuation gap as City falls to takeovers

London’s stock market has seen a sharp uptick in takeover premiums this year, as it continues to be hollowed out by private equity deals.

The average premium bidders offer relative to the undisturbed share price for the 22 deals with public terms has hit 45 per cent, according to AJ Bell.

Foreign buyers account for 86 per cent of total deal value, with US buyers representing half of all overseas approaches, as they continue to circle FTSE stalwarts.

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 businesses were picked off the market, including engineering firm Rotork, which fell to Swiss rival ABB for £4.1bn at a 73 per cent premium.

The mid-market has also fallen victim to the wave, as FTSE 250 budget airline Easyjet agreed in principle to a £5.7bn takeover bid from Apollo, placing it at an 81 per cent premium. But while these large premiums may benefit the companies, it marks yet another bleak chapter for London’s dwindling stock market, which is failing to attract new IPOs.

Since 2023, there have been 154 bids for UK companies with a market value of more than £100m, erasing £165bn of stock market capitalisation, according to Peel Hunt. In contrast, there have been just 11 listings in London by companies surpassing £100m, bringing total capitalisation to £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 swiftly rejected a £12.6bn bid from US real estate firm Prologis, arguing it was “opportunistically timed”, and 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”, and, despite investors enjoying a short-term share price uplift, the trend is causing long-term damage.

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.

“It is a slow leak across multiple channels,” Fine added.