Last year a stock within Lowland had a takeover offer roughly every couple of months. The pace has not dropped this year. We have already seen another two – one for Wincanton, which their Board recommended, and one for Elementis, which was rejected.
Typically offers came in at a significant premium to the market valuation and they helped boost the Trust’s performance. But I still feel guilty. Why?
Some of the takeovers were at what most would consider a fair price and you could see synergies and opportunities for efficiencies. That was the case with SARIA’s £540m deal to buy the sausage casing manufacturer Devro. Another German company buying a British company was Deutsche Bank, which paid £410m for the broker Numis. The Devro deal was at a 100% premium; the Numis at 70%. I guess you could say everyone was a winner.
Sadly, the same cannot be said about others – particularly those from private equity buyers who in most cases do not bring synergies and are focused purely on taking advantage of weak sentiment towards UK stocks to snap up good companies cheaply.
A good example of that is K3 Capital. This is a business focused on corporate services like tax, restructuring and M&A. It was bought by a private equity company at the beginning of last year. The premium? Just 17%.
At that price you were looking at an earnings multiple in the mid-teens. And this for a business growing by more than 20% a year organically, with cash on its balance sheet and a very attractive operating margin.
We opposed the deal and were disappointed when it was passed, but I can understand why other managers may have given it the nod. If you are managing an open-ended fund and facing redemptions, you may have to sell. And in a relatively illiquid market like this it must have represented a useful opportunity for some.
The same happened again when private equity buyers came in to swallow Finsbury Food, which makes baked goods for supermarkets. That deal – priced at £1.10 – valued Finsbury at just 11x this year’s earnings. Yes, it was at a premium of close to 60%, but the share price was on a low. The offer was not much beyond where Finsbury had been trading earlier in the year. It was an opportunistic deal.
I liked Finsbury. It was a well-managed company with a strong balance sheet and had potential to grow internationally. But we didn’t wait for the transaction to go through. We sold straight away when the share price bounced.
I felt guilty, but there are no shortages of opportunities in the UK at the moment and it seemed sensible to move on.
What saddens me is that both these companies are now lost to public markets. In the past five years we have seen the number of listed companies in the UK shrink by 20% through acquisitions or mergers. In 2023 the AIM market alone shrank by 12%. And we are not seeing IPOs to counterbalance the outflows.
A healthy equity market is important for the UK economy. These markets are a vital source of capital for entrepreneurs. They enable companies to grow, create jobs, invest and flourish.
I believe we have reached the point where fund managers, including me, need to be more resilient in opposing these cheap offers.
In the meantime, UK investors may want to take a leaf out of the private equity buyers’ books. The volume of these deals shows that they see the UK market as full of great opportunities. On that score at least we are in complete agreement.
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Glossary
Balance sheet
A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.
Earnings per share (EPS)
EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.
Equity
A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Initial Public Offering (IPO)
The process of issuing shares in a private company to the public for the first time.
Premium
When the market price of a security is thought to be more than its underlying value, it is said to be ‘trading at a premium’. The opposite of discount.
Share price
The price to purchase (or sell) one share in a company, not including fees or taxes.
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