London to lose hundreds of companies by 2028, warns City broker

LONDON is on course to lose hundreds of companies by 2028 as basement price valuations trigger a surge in cheap takeovers, a City broker has warned.

Peel Hunt said London’s stock market index of small companies will cease to exist by 2028 unless the Chancellor intervenes with radical reforms to boost the City.

The FTSE Small Cap index includes companies with a valuation of less than about £250m.

Charles Hall of Peel Hunt described the pace of decline for the UK equity market as “relentless”. He added: “If we do see increased demand for UK equities, then valuations should improve materially, which would then make an IPO a more attractive option.”

The cheap valuations of UK companies has led to a string of takeovers in recent months.

Twelve listed companies succumbed to takeovers in the first three months of 2024 in a deal-making blitz worth £17bn, latest figures show, further shrinking the pool of companies listed on the exchange.

Deals included Nationwide’s £2.9bn bid for Virgin Money and bidding wars for the logistics company Wincanton, the cyber-security specialist Spirent and packaging giant DS Smith. The number of deals is a step up from last year, when only two takeovers of a similar size were announced.

Peel Hunt said the average cash premium paid by acquirers so far this year is 55pc above the listed share price, a sign that UK stocks are significantly undervalued.

The average premium has typically been 30pc to 40pc in prior years. Last year the average premium was 50pc.

Because of the cheaper price of UK stocks, bidders are able to table takeover offers well above the stock price.

GXO Logistics’ recent offer for Wincanton represented a 106pc premium, worth 605p per share for the group versus 297p before the bid was revealed. Mars bought Hotel Chocolat last year at a premium of 170pc, the most eye-catching premium paid in the latest takeover rush.

As more companies are acquired, smaller stocks are being promoted into the FTSE 350, leaving fewer for inclusion in the Small Cap index.

The FTSE 350 index ranks the largest 350 companies by value. The FTSE Small Cap includes companies too small for inclusion in the FTSE 350.

The Small Cap index contained 114 companies last year and this is expected to fall to around 100 if the pace of takeovers continue. There were 160 companies included in the index in 2018.

Given the current pace of promotions to the FTSE 350, the Small Cap index will likely have no companies left in the next four years, Peel Hunt said.

At the same time, the number of new companies listing has slowed to a trickle. Only two new companies debuted on the London stock market, Air Astana and Microsalt, making it the worst quarter since 1995, according to Dealogic figures.

The Chancellor Jeremy Hunt has unveiled a string of reforms to try to boost London’s moribund stock market, including plans to water down listing rules for new entrants.

A British Isa has also been unveiled to try to boost investment in UK stocks from retail investors.

Separately, Peel Hunt published its latest trading figures which showed revenues rose 4pc last year to £85.5m despite the tough market backdrop.