The first half of 2021 has seen the highest number of private equity deals in the UK in five years. With Morrisons and Ultra Electronics both deep in negotiations, while Sainsbury’s is rumoured to be next-up for a takeover approach, it appears as though this trend is here to stay.
Last week Morrisons’ board accepted a £7bn takeover offer by Clayton Dubilier & Rice as the private equity company outbid its rival with a 285p per share offer. The FTSE 100 company’s board changed its mind having initially supported Fortress’ bid.
Back in July Morrisons had turned down an offer of £5.5bn from Clayton Dubilier & Rice suggesting it was significantly under market value.
Additionally, after the government requested an investigation to be carried out into the proposed £2.6bn takeover of Ultra Electronics by American private equity firm Cobham, the deal looks likely to go through.
Warning that foreign investment “must not threaten national security”, Kwasi Kwarteng, the business minister, put forward an order in parliament preventing Ultra from disclosing “sensitive information” to Cobham, the company behind the takeover bid.
While private equity companies earn shareholders the chance of getting a premium price in the immediate-term, the deals can remove the potential for longer-term growth, particularly for UK investors.
Why the UK?
A host of UK stocks have been on the receiving end of bids this year, particularly from American private equity firms, in a sign of the current value in the UK equity market.
The UK is being targeted because it is very cheap according to Ian Lance, Portfolio Manager of Temple Bar Investment Trust – “it is at the biggest discount to the MSCI World for fifty years”.
The FTSE 100 index has added 8.24% so far this year, and is being outperformed by the S&P 500, up 20.02% year-to-date, as well as the DAX, which is up 15.50%.
Additionally, Lance feels that the UK, compared to other nations, is quite friendly to takeovers from a regulatory point of view.
Ed Wielechowski, Manager of Odyssean Investment Trust, said: “Whilst we do not believe UK listed companies as a whole are undervalued, there are pockets of above average quality companies which are trading at below their intrinsic values. Fundamentally, this drives bid activity.”
Private equity firms are also flush with cash and able to swoop in on these opportunities due to the fact they are able to borrow money very cheaply.