Buyout frenzy in the FTSE 250 set to take off... as shares nosedive
A DEALS bonanza could soon sweep through Britain’s medium-sized firms and hollow out the FTSE250, according to City sources.
Bankers say plummeting share prices and the sliding value of sterling make firms increasingly attractive to predators despite the collapse of some big company deals. They said US buyers now enjoy a significant discount compared with the start of the year.
Since the beginning of January, the FTSE250 has fallen 22 per cent and the value of the pound has dropped 14 per cent versus the dollar.
One senior banking source accepted that debt markets have tightened, undermining large deals including a £6 billion attempt to buy Boots and a £15billion swoop on energy infrastructure group UK Power Networks.
But he said the shift in currency valuations and share price declines meant a ‘significant discount’ of around a third for US purchasers. He said the shift could mean as many as one in five of FTSE250 firms could become targets.
The source said mid-sized firms are particularly vulnerable because they do not require vast amounts of debt to buy.
‘Around 7 per cent of the FTSE 250 are currently under offer or subject to bid speculation, but I think, below the radar, the number is three times that,’ he said. The source said that could mean a ‘hollowing out’ of firms – particularly high-tech companies and others in high growth sectors.
‘My worry for the market would be that not enough start-up firms are getting to the size we need to replenish those being bought,’ he added. ‘We need to keep the hopper refilled if this continues and I’m not sure that is happening.’
Peel Hunt research shows 38 public companies on the London Stock Exchange are currently under offer as ‘overseas trade buyers continued to demonstrate interest in UK public markets’.
Canaccord Genuity said in a
recent report that a £1.6billion takeover approach for Euromoney – first revealed by The Mail on Sunday – was ‘a stark reminder’ that, despite fears on the economy and Ukraine, private equity companies are ‘still stalking the UK for oversold highly cash flow generative companies’ that they believe will be least affected.
Canaccord Genuity said FTSE 250 stocks Computacenter, Future Plc, IMI, Moneysupermarket.com and NCC Group could soon be takeover targets.
Last month, the Government waved through a £2.6billion takeover of British defence manufacturer Ultra Electronics, which supplies technology for the F-35 fighter jet.
Another senior mergers and acquisitions adviser in the City said declining share prices in retail, ecommerce, consumer and travel stocks had also attracted the attention of private equity firms. ‘They think the fall in the stock price of certain companies has gone too far,’ the adviser said.
Private funds are sizing up potential deals on the basis that the market’s reaction to higher inflation and a rise in interest rates had been overdone.
The source said sellers may begin ‘resetting’ price expectations – perhaps accepting offers at valuations they would not previously have considered.
Among those that have seen a significant drop in share price in the last year are home retailer Made. com, tonic maker FeverTree and On the Beach Group, a travel retailer.
Ecommerce THG earlier this year rejected a £1.70-ashare offer from Belerion Capital and King Street Capital that valued it at £2billion.
Identity data software firm GB Group is among London-listed firms targeted by private equity groups and US-based trade players, according to sources in the City.
‘It’s quite cheap now given the technology selloff and too big to remain on AIM given its valuation of £1.5billion,’ according to one source, who suggested that it either has to move to the main listing or go private.
Interest in identity verification management has increased in the last year as corporations move traditional methods of authentication online.
BAE Systems last week sold its fraud detection firm NetReveal to software group SymphonyAI.
SmartSearch, an anti moneylaundering software firm based in West Yorkshire, is expected to be put up for sale later this year. American private equity owner Marlin Equity has appointed advisers at Rothschild to prepare the business for an auction process, City sources said.