Hidden goldmine
The firms worth more than you thought
Twenty billion? Twentyfive? Thirty billion? By the end of today, the takeover battle between Comcast and Disney/fox for the satellite broadcaster Sky will go to a final auction. It is likely to fetch a huge price, and far more than anyone thought it was worth a couple of years ago. Whoever comes out ahead in what has turned into an epic contest of corporate egos, shareholders will be celebrating. They will have done better than they could have hoped.
But they should also reflect on how much more value might be lurking within the FTSE. After all, Sky is not the only example. Costa Coffee turned out to be worth far more than anyone thought, and so did GKN. In truth, the market is undervaluing lots of business, and often dramatically so. As that becomes clear, investors could make a lot of money.
Rewind a couple of years, and Sky looked like a company heading for trouble. The price of sports rights kept on escalating, Netflix was delivering fantastic programmes for a far lower monthly subscription and the likes of Amazon and BT were muscling in on its market with almost unlimited cash. Between 2015 and 2016, as those fears grew, the shares dropped from more than £11 to just 770p. Investors were bailing out. Then in the last year, bids have emerged from both Fox and Comcast, two of the largest media conglomerates in the world.
After offer and counter-offer, the Takeover Panel has insisted on an auction to get the matter settled. The share price has already doubled to more than £15, and the final price could be a lot higher.
There are other examples of something very similar happening. A few months ago, you could easily make the argument that with a saturated market, rising staff costs, punishing business rates and a sluggish economy, Costa Coffee didn’t have as much going for it as it once did. But then Coca-cola turned up with one of the biggest chequebooks in the world and offered Whitbread £3.9bn for a chain it had planned to demerge. Likewise, the engineering conglomerate GKN had been drifting along for years amid general indifference. Until Melrose suddenly turned up with a hostile offer, no one thought it was worth anything close to £8bn. All of a sudden, it was worth a lot more than anyone realised. Are there many other major British companies that the market is misunderstanding? There are three reasons for thinking there might be.
First, there have been so few contested bids over the last decade that it is very easy for assets to be neglected. It is only when an offer is made, and preferably a counter-offer as well, that the value becomes apparent. Almost two decades have passed since the last real M&A boom, and the decade since the financial crash has been exceptionally quiet, so there may well be lots of sprawling companies that are worth much more than the market realises right now.
Next, cumbersome regulations mean there is far less broker analysis than there used to be. Dozens of highly skilled experts used to crunch through the numbers of every major FTSE company. If it was undervalued, they would usually spot that, and start to push the share price up. Most of them have now vanished. That makes a difference. The market often doesn’t have much of a clue what is happening inside a company, and whole divisions can be virtually ignored.
Finally, fears over our looming exit from the European Union mean that British shares are relatively neglected by global investors. They got out in June 2016, and they aren’t planning to get back in until the deal becomes clear – and that isn’t going to be for a while yet. The result? From media to pharmaceuticals, to consumer goods and banking and financial services, a lot of major British companies might well turn out to be worth double what anyone thinks they are now.
Such as? That is always the tricky bit, of course. But it is not hard to think of some obvious candidates. Both HSBC and Barclays might well be worth a lot more if some of their assets were sold off – indeed, the activist investor Sherborne is already pressing for big changes at Barclays.
The drugs giants Glaxosmithkline drifts along for year after year as aimlessly as GKN once did. There might well be lots of treasures hidden inside its sprawling empire, especially among its consumer goods brands.
We might well find that, rather like Costa Coffee, M&S’S food business was a fantastically valuable franchise held back by a dowdy, struggling clothes retailer. Likewise if Sky is worth more than £25bn, then ITV might be worth a lot more than £6bn. After all, it has a lot more original programming.
Once you start to look for them, there are lots of companies that are undervalued, underappreciated, or with a potentially fast-growing unit that have been neglected within a struggling parent company.
It takes a trigger to unlock that, as it has with Sky, and as it did with GKN earlier this year. But for investors who can spot that before the bidders do, there will be a lot of money to be made.
‘The market is at present under-valuing lots of business. Investors could make a lot of money’