While the biggest takeover news of the week has undoubtedly been HSBC’s £1 purchase of the UK arm of collapsed US financial institution Silicon Valley Bank, in recent years M&A activity has largely been focused in the other direction, with overseas buyers taking advantage of the weak pound and poor stock market sentiment to snap up UK-listed companies such as supermarket group Morrisons.
Morrisons remains a household name and was formerly a constituent of the blue-chip FTSE 100, but the majority of the deals take place further down the market cap spectrum, such as the revised bid yesterday for events organiser Hyve Group (a FTSE 250 company) or the recent takeover of small-cap sausage casing maker Devro by a German buyer.
With average forward P/E valuations of UK stocks across the market cap spectrum being substantially below long-term averages and at a significant discount to both the US and European markets, it is perhaps unsurprising that foreign buyers are shopping for bargains. But what does this mean for UK-focused fund managers and investors, both in terms of lost future returns and a narrowing of investment choice?
“When companies with really good long-term growth potential get picked off by trade or private equity buyers, the shrinking of the universe does make life harder for a diversified fund manager,” says Stuart Widdowson, manager of Odyssean Investment Trust (OIT). As a highly concentrated fund with a focus on long-term value enhancement, OIT only needs to find a limited number of new ideas each year, yet M&A in the portfolio has certainly been a feature in recent months.
Ascential, a global B2B media services business, was a new position in the portfolio in H1 2023, but became OIT’s biggest holding after its share price surged in January on the announcement of plans to break up the business. “We bought it because we liked the company, but also because its sum-of-the-parts valuation looked very attractive,” says Widdowson.
He points out that at the time OIT purchased the stock, Ascential’s share price had come under pressure partly because one of its largest shareholders, an open-ended fund, had had to reduce its position in order to cover its own outflows. Thus, although bought with a view to long-term returns, Widdowson is happy with the 34% increase in the share price since the announcement of the break-up plans (and a rise of 53% since the low point in November 2022) as it reflects the start of a re-rating process.
“On an individual company basis, you have to be quite dispassionate about what is a ‘good’ outcome,” he says. In the case of Devro – another OIT holding, albeit one that was outside the top 10 holdings and was therefore undisclosed until the offer came in from Saria – the bid premium looked very attractive for a company that had been struggling to gain attention.
“Although the management team that came in a few years ago had done a really good job of improving Devro’s prospects and grinding out returns, as a listed company it was never going to be a big ‘growth’ prospect, so perhaps it is better as part of a private company,” Widdowson explains.
However, Doug Smith of Blackmoor Investment Partners – also a long-term investor focused on active value creation – says the attractiveness of a bid premium needs to be gauged with an appropriately long-term perspective. In the case of Hyve, while Providence Equity Partners’ revised 108p offer might look fairly compelling in the context of a 52-week range (excluding the period since the bid) of 49.5p to 93p, Hyve’s shares were trading above £6 in early 2020, before the triple-whammy of Covid and exposure to the Russian and Chinese markets brought them to their recent lows. “All of those factors are now starting to dissipate and the business looks very strong,” Smith says.
He points out that Hyve has made a number of substantial add-on acquisitions since the start of the pandemic, the value of which alone are roughly equivalent to Providence’s £320m fully diluted price tag for the company.
Widdowson – who has disclosed OIT’s position in Hyve as a result of the bid – says there has been significant M&A interest in B2B media companies in recent years, with good premiums paid for the likes of publishing, data and events company Euromoney, a long-term holding that exited the OIT portfolio last year after a bid was agreed. “Because they are public companies and they have many other shareholders, you can’t stand in the way of bid approaches,” the manager says, although he adds that OIT’s ability to hold up to 20% of its portfolio in unlisted investments gives the trust the possibility of remaining invested in companies that are taken private, should the terms of the deal prove less than compelling.
Smith argues that in times of uncertainty, public markets – and particularly those investors for whom inflows and outflows are a concern – become more short term, which can give rise to attractive opportunities for long-term holders. “We, as long-term shareholders in public companies, have a responsibility to stand up and say when we think a bid is low,” he says, adding that in any takeover situation it is important to seek to understand the motivations of all involved – the board, the executive team and the shareholders of the target company, as well as those making the bid.
“Devro and Hyve are both examples of the challenges facing public companies and public company owners,” says Smith. “A lot of it comes down to the funds you can deploy, and those with a longer time horizon are privileged. We will stand up and be supportive shareholders, but equally we have a duty to flag it if we don’t think the deal is a good one.” He adds that as a long-term shareholder of Devro, Blackmoor worked with the bidder to improve the offer before signing an irrevocable undertaking. “We will support a bid when it is right for the company, shareholders, and stakeholders.”
Whatever the outcome of the current bid approaches, perhaps the lesson for shareholders in UK plc is to be prepared to make their presence felt, or risk the erosion of future opportunities in the publicly listed arena.