10% of FTSE 250 set to disappear if deals proceed
Low valuations are partly responsible for a record level of bid interest in FTSE 350 companies, and there’s a real risk that more mid-caps will be lost to corporate and private equity bidders.
2nd October 2024 13:16
by Graeme Evans from interactive investor
Mid-cap companies worth 10% of the FTSE 250 index are potentially heading off the London market after figures today highlighted a surge in takeover activity in 2024.
The analysis by Peel Hunt found there are 19 ongoing bids for stocks listed in the FTSE 100 and FTSE 250 indices, compared with just two in the whole of last year.
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In total, the investment bank has recorded £47.1 billion of completed or current bids for 40 companies where their valuation exceeds £100 million. The average bid premium is running at 40% versus the undisturbed share price.
Peel Hunt said: “The UK continues to be a happy hunting ground for both corporate and private equity bidders, due to low valuations and willing sellers, although there is greater propensity to rebuff bids seen as too low.”
The bank gives the example of Rightmove (LSE:RMV), which this week rejected a takeover proposal worth £6.2 billion after four takeover approaches by Australia’s REA Group. Offers for Anglo American (LSE:AAL), Currys (LSE:CURY), Direct Line Insurance Group (LSE:DLG), Elementis (LSE:ELM) and XP Power Ltd (LSE:XPP) have also been rebuffed.
Multi-billion-pound deals have included the recently completed takeover of Virgin Money UK (LSE:VMUK) by Nationwide, as well as for Redrow, Darktrace (LSE:DARK), Britvic (LSE:BVIC) and FTSE 100-listed DS Smith (LSE:SMDS).
There are 18 bids currently in progress in the FTSE 250, a figure that includes Hargreaves Lansdown (LSE:HL.) as it was only promoted to the FTSE 100 after its private equity takeover agreement.
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The FTSE 250 interest amounts to 7% of the total number of index constituents, or 10% by market value based on an overall total of £34.7 billion.
The surge will fuel concerns about the current lack of IPO activity to replace those companies being bought. Including takeovers announced last year and de-listings from the UK, Peel Hunt notes that the London market is facing the loss of companies with a value of £97 billion.
There’s also an impact on the FTSE SmallCap, where promotions to the FTSE 250 to replace the companies being acquired has added to five planned departures worth £700 million.
Peel Hunt said: “Although there are tentative signs of the IPO market starting to emerge from hibernation, it seems 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.
“We believe we need to address the demand side, if the UK is to retain its growth companies and to ensure that the equity market is able to provide long-term growth capital. In our view this can be delivered through pension reform, ISA reform and a national wealth fund.”
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On AIM, year-to-date bid activity worth more than £100 million has involved 14 companies and included Keywords Studios (LSE:KWS), Lok’nStore, Alpha Financial and Learning Technologies.
Unlike last year, corporate buyers have dominated in 2024 as the clearer interest rate and economic outlook demonstrates the value of UK companies. It is also driven by the potential for merger synergies in a low-growth environment.
Peel Hunt expects that private equity will be a more active buyer going forward, given that it is sitting on £4 billion of “dry powder” and should see financing conditions improve.
Technology and real estate have been the most active sectors, with the current market value of companies being acquired at £10 billion and £4.5 billion respectively.
Some approaches have been materially higher than the undisturbed price, such as Wincanton at 104%, Spirent Communications (LSE:SPT) at 86% and Royal Mail owner International Distribution Services (LSE:IDS) at 73%.
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