Nick Train and Alex Wright: takeover fever shows UK market is cheap

The region remains unloved, despite takeover fever continuing to spread and improved performance. 

Both the UK market and funds investing in the country have enjoyed a strong spell of performance over the past nine months, but retail investors remain lukewarm towards their home market.  

This is despite plenty of takeover fever among UK companies, with US companies and US private equity firms viewing the UK as a good place to do business on valuation grounds. 

In addition, the UK economy continues to stage a recovery. Figures released this morning showed the UK economy expanded by 4.8% in the second quarter. This was slightly behind the Bank of England’s 5% forecast, but the 4.8% figure was viewed positively given that lockdown restrictions did not ease until towards the end of June. 

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Nick Train, manager of Lindsell Train UK Equity and Finsbury Growth & Income investment trust (LSE:FGT), and Alex Wright, who manages Fidelity Special Situations and Fidelity Special Values (LSE:FSV), both make the point that while the region continues to be unloved among investors, UK companies are attracting plenty of attention from overseas suitors due to their cheap valuations.

Data from Refinitiv shows takeovers of UK companies hit a 14-year high by value in the first seven months of this year. The total value of the deals over this period was $198 billion (£142 billion). This represented a more than threefold increase compared to the same period last year.

Takeover fever is continuing to spread. In early August, defensive and aerospace firm Meggitt (LSE:MGGT) agreed a takeover deal from US company Parker-Hannifin. Elsewhere, Morrisons (LSE:MRW), the supermarket chain, is attracting plenty of interest.

In an update to investors, Train made the point that takeover activity shows how cheap UK shares are compared to the US. He pointed out that the valuations of UK companies with a strong digital presence would attract higher price tags if they listed in the US.

Train picked out Experian (LSE:EXPN), RELX (LSE:REL) and London Stock Exchange Group (LSE:LSEG), as examples in which “possible undervaluation can be ascribed to the lingering discount that global investors appear to demand to hold UK listed companies, compared to those quoted on other markets around the world”.

He added: “Simply stated, if Experian, LSE or RELX were US companies we think they could be more highly valued.”

Train further pointed out: “That is not just an idle assertion on our part. There is confirmation when you see the current interest being shown by US corporations and US private equity houses to acquire UK corporate assets. The ostensible valuation gap looks attractive from the other side of the Atlantic too.

“Investors, particularly US investors, understand the value that digital and data companies generate for their owners when they grow. Their capital-intensity is low, meaning returns on capital are high and copious cash generated. I say particularly US investors, because companies with similar characteristics have been right at the forefront of the bull market there and very high valuations have been achieved.”

Wright, a contrarian investor who invests in value shares, agrees that the increase in bid activity shows that the UK market is cheap.  

On interactive investor’s Funds Fan podcast, Wright pointed out that three of his holdings have recently agreed to takeovers: John Laing (LSE:JLG), Ultra Electronics (LSE:ULE) and Meggitt.

Wright said: “The UK market, despite strong performance over the last nine months, continues to be much cheaper than other international markets, particularly versus the US market, which remains on very high multiples.”

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He added: “I think that the big increase in bid activity...is a reflection that UK assets versus assets either on other stock markets or in private markets, are just at too low a valuation.

“And to me, it is surprise that you have not seen more of a valuation pick-up in the UK given all this activity. I think that is just the fact that investors more broadly have been a bit slow to increase their weightings to UK equities.”    

In March and April, UK funds posted inflows, which at the time represented an early sign that sentiment was starting to improve towards the region. Over the past couple of years, investors have turned their backs on UK funds, owing to Brexit uncertainty followed by the Covid-19 pandemic.

However, in May and June investors gave the region the cold shoulder. The latest Investment Association (IA) figures to the end of June show that UK funds were the only region to post outflows - of £77 million - across the month. This is against a backdrop of funds being in high demand, with the IA recently reporting the highest level of half-year sales since 2017 at £24 billion.