Is the entire UK stock market up for sale?
You could be forgiven for thinking so. Three separate announcements on Monday show just how vulnerable much of corporate Britain is to money-bags private equity houses, usually American ones.
First oil and gas firm John Wood said it would actively consider a £1.7 billion offer from CVC Capital and Francisco Partners. It has refused three lower bids, but still, the 240p offer is half what the shares were a few years ago.
Then payments provider Network International said it had received a £2 billion, 387p a share offer from CVC Capital and Francisco Partners. That’s also about half what the stock was not so long ago.
Which suggests management have given up on the UK stock market giving their shares the love they might think they deserve.
Later on yesterday, THG, a retail e-commerce player that has had a very rough ride on the stock market said it has also had a bid from Apollo. No price was given, but the stock lept 40% valuing the business at well over £1 billion.
What’s going on?
Well, as we reported here on Friday on the back of some research from Alan Miller at SCM Direct, UK shares are dramatically undervalued, at least compared to those in the US.
A UK company after three years on the stock market is valued at 15 times earnings. The US equivalent is closer to 25 times, which explains why new companies, especially tech firms, prefer the idea of a New York listing over a London one.
Are we running out of listed companies? Well, not quite but figures from the Quoted Companies Alliance show that the number of UK stock market listed companies has been falling for 20 years. There were 3273 listed companies in 2007, now there are fewer than 2000. That’s quite alarming.
We asked Charlie Huggins, manager of the Quality Shares Portfolio at Wealth Club, for his top three potential private equity targets. He says:
Sainsbury’s
- There’s been plenty of interest in UK grocers in recent years – with CD&R snapping up Morrisons and Asda going into private hands after its proposed merger with Sainsbury collapsed. Sainsbury would be the natural next target, with its position in the squeezed middle putting it under pressure in recent years and the shares trading on a lowly 11x earnings. £9.7bn of property assets could help fund the deal through a sale and leaseback deal too.
Jupiter Fund Management
- Asset management is all about scale these days, and that’s something Jupiter is lacking. AUM of just £50.2bn and falling makes it a relative minnow. Acquisition by a larger competitor can’t be ruled out, but it’s strong retail distribution network might also make it a target for private equity groups that are looking to increase their access to high-net-worth clients in Europe.
Spire Healthcare
- Private healthcare has long been fertile ground for PE. Spire is itself the product of the sale of BUPA hospitals to Cinven in 2007, before listing in 2014. Net debt is high, at 2.2x EBITDA, which might put off a potential PE buyer, although again there’s a decent freehold property portfolio to borrow against. Recent acquisitions of private GP’s surgeries might provide a route for future acquisition driven growth under private ownership.
Could Sainsbury’s really be a target for private equity? Well, one problem is that the Qatar Investment Authority holds a 15% stake and it would have to approve a bid. But perhaps it is looking for an exit.
Daniel KÅetínský, the Czech billionaire with a 10% stake might also have a strong view.
Why is private equity so busy? The theory goes that now fears of a fresh banking crisis have subsided, but share values at still low, it is time for them to strike.
These funds have a huge amount of cash on hand and they have to do something with it before very long, else clients will be wondering if they are missing out.
Rebecca Burford, a partner at Charles Russell Speechlys, says private equity has been on the up for some time.
“While we did observe a bit of a slowdown in private equity last year, this followed a record year for dealmaking in 2021, so just looking at the 2022 numbers in a vacuum can be a little misleading. The reality is that private equity has been going strong for quite some time.”
She adds: “Private equity leading the way this year is not just down to opportunism and other dealmakers worrying about a banking crisis. Even without the concerns of a potential banking crisis, PE would still be booming.”
In April last year, the Private Capital market, valued at $10 trillion in 2021, was forecast to grow to between $18 trillion (Prequin) and $30 trillion (Goldman Sachs) by 2026.
Burford says: “We don’t believe that private equity market or growth of private capital more broadly will slow down any time soon.”
