UK merger activity anticipated

Broker Peel Hunt believes that the current level of bidding activity means that the market is undervalued. It thinks that the potential vaccine means that bidders will take a longer-term view and assuming talks with the EU do result in a trade deal that will remove further uncertainty.

While AIM has outperformed most markets around the world, the Main Market has been a laggard. That means that fully listed companies are particularly attractive to overseas bidders. Nearly three-quarters of revenues generated by the constituents of the FTSE All Share index come from outside of the UK.

The passing and cutting of dividends has hit share prices and this has been a factor in underperformance in some of the fully listed companies.

Proposed and announced bids in the past two months have a total value of £22bn according to Peel Hunt. One company is in the FTSE 100 index and five are in the FTSE 250 index. There are four bids for small fully listed companies and four for AIM-quoted companies – although that excludes the bid for the much smaller LiDCO. They cover a wide range of sectors, although three are technology businesses.

Peel Hunt suggests a number of potential bidders and targets across all sectors. Here are some of the suggestions.

Video games

The potential acquisition of Codemasters by Take-Two Interactive could bring other video games developer deals to the fore.

Frontier Developments (LON: FDEV) and Team17 (LON: TM17) are companies that could be attractive to larger video games developers.

Oil and gas

One of the sectors that Peel Hunt believes has plenty of bid targets is oil and gas. Consolidation is overdue in the sector in the UK. Fewer, more liquid companies will be more attractive to investors.

The Premier Oil merger with Chryasor Energy is an example of a combination that will provide a much larger and more attractive investment.

Peel Hunt has a number of suggestions of oil and gas companies that could be acquired or lead a merger. They include Serica Energy (LON: SQZ), Jadestone Energy (LON: JSE), Wentworth Energy (LON: WEN) and SDX Energy (LON: SDX).

Property

Discounts to NAV for property companies have been narrowing, particularly if they are not overly exposed to retail. This means that potential bidders may have to offer more than they would have had to a few months ago.

There has already been stakebuilding by private equity firms in Great Portland Estates (LON: GPOR), British Land (LON: BLND), RDI REIT (LON: RDI) and McKay Securities (LON: MCKS).

Retail

Retail is one of the main sectors that is out of fashion with investors. Many of the retailers are best avoided, but others have been dragged down with them when they are still performing relatively strongly – or at least better than their ratings suggest.

MS Galleon, which has connections with a European tiles business, has a 20% stake in Topps Tiles (LON: TPT), where trading has remained strong and there is cash in the balance sheet.