• Strategics push forward during window of stability
• Sectors most impacted by base rate likely to transact
• Phoenix M&A rationale builds for 2021 lapsed listed deals

Strategics have been taking advantage of the recent relative period of stability and chronically undervalued UK stocks to take a larger bite out of UK public markets, according to dealmakers.

As interest rate expectations have settled and inflation has calmed, listed UK deal activity has been revitalised as corporates look to M&A to boost growth. Dealmakers have said that in the months to come UK M&A is expected to see further activity in previously considered strategic tie ups, small and mid-cap transactions, and with sectors like financial services leading the charge.

So far in 2024, live and expected UK deal announcements involving listed companies with a market capitalisation of GBP 300m or more, have tallied up to GBP 19bn compared to just GBP 1.2bn in the same period in 2023. That’s across 10 deals this year, compared to three in 2023.

“Last year there were more bite sized deals, there was not the stability for larger deals or more complicated credit. We are now in a more stable period,” Henrik Persson, head of strategic PLC advisory from Cavendish PLC said.

This wave of M&A is long overdue in the aftermath of the Covid-19 pandemic, where there was the expectation that the “winners” from the pandemic would buy the “losers,” Persson said.

There is a combination of a slightly improved outlook for growth as well as pent-up demand from the period of ultra-low activity, dealmakers said. For the companies in the public markets, there is a sense of urgency to act before the tide potentially turns again, they said.

So far this year, many of the deals that have been announced have been “rehearsed deals”, said Stuart Ord, Co-head of M&A at Deutsche Numis, noting the trend of bids being first announced as potential 2.4 announcements. One example is the Virgin Money [LON:VMUK] transaction that was confirmed in a 2.7 announcement this morning (21 March), but was first revealed in a potential bid announcement on 7 March.

Financial services is a key sector for strategic combinations, with further activity expected in banking and beyond. “We expect to see more activity in investment trusts, real estate and financial services. That is where the base rate has had the most impact and they need the scale. We have had real estate and housebuilder M&A. There is a real fear of missing out,” Ord said.

“There is a lot of chatter about funds consolidation, people are pulling cash costs out of running a fund. People are waking up to the idea that 2+2 = 5 even after deal costs,” Persson said. “They are all talking to each other – if you put two discounted firms together they benefit from financial benefits. Why would I pay for two managers. Everyone has got some funds work.”

The driving force behind activity during this window of relative calm ahead of the UK general election is that companies are looking at repositioning to achieve a rerating of their share prices, a lawyer said. This strategic rationale behind deals is shown in this year’s trend for share considerations in the UK. Last year, public markets activity was more dominated by private equity players, however, of 10 large cap listed announcements in the UK so far in 2024, just one had a PE buyer. There are currently six live and expected deals involving a share consideration.

PE, however, is finding creative ways to unlock take privates, a UK-based banker said.

One example is the GBP 1bn cash bid for UK-based telecommunications company Spirent [LON: SPT] from Viavi, which is backed by a USD 400m 4% 7.5-year convertible senior payment in kind toggle note from Silver Lake.

Meanwhile, Pollen Street’s bid for Mattioli Woods [LON: MTW] was eye-catching due to the idea of a UK private equity firm taking over a UK-based wealth manager, which in contrast to previous years, was a UK to UK deal. However, Ares Management’s GBP 160m of private debt to fund the take-private shows that international money continues to drive transaction flow.

Phoenix from the ashes: return of lapsed deals

With the improved environment for M&A, the search for new strategic combinations could encourage companies to revisit lapsed deals that were rejected or abandoned, particularly on valuation grounds, before the 2022 reset in market conditions.

The dealmakers agreed there is the possibility for further activity from lapsed deals from the 2021/2022 period as valuation expectations settle and the need for buyers to transact persists. If a deal made sense in 2021, and the strategic logic persists, the buyer could come back for a second bite at the target, the dealmakers agreed.

“Now there are more favourable conditions in the market, you could see people having another go,” the lawyer said. “A lot is in the control of the target boardroom. If they have been chronically undervalued, then there is only so much time they can spend fighting against the tide,” they added.

Redrow [LON:RDW], for example, had been the subject of perennial takeover speculation before Barratt’s [LON:BDEV] GBP 2.5bn all-share bid for the UK housebuilder this year. In 2012, Steve Morgan, the founder of the Ewloe, Wales-headquartered new homes developer attempted a take-private backed by Toscafund. Redrow saw subsequent takeover chatter in recent years, with Persimmon [LON:PSN], Taylor Wimpey [LON: TW] and Blackstone [NYSE:BX] tipped as bidders.Data from this news service shows the potential for 2021 deals to come back to the market, with significant market cap drops from their lapsed deal values as well as strong strategic rationale.

Renishaw [LON:RSW], for example, saw a founder-driven formal sale process end without a deal in 2021, after bids were rejected. Its market cap has since dropped from GBP 4.4bn to GBP 3.1bn. As reported, the rumoured suitors could return, with sellers who are motivated to complete a deal.

Though expectations of listed activity persist, none of the dealmakers anticipated a return to blockbuster M&A, with expectations resting on the small and mid-cap arena.

The UK is losing its appeal to corporates, that prefer instead the suite of capabilities offered by private equity, dealmakers said. Chronically depressed stocks, and the impact of sterling means that the current wave of public takeovers could lead to an exodus from the London exchange in years to come, with entrepreneurs favouring the more generous US valuations or private equity backing.

The UK-based banker pointed out that for some entrepreneurs after a few years on the London exchange they felt that the private markets would be a better option for them, without the scrutiny that comes with the public markets.

Persson expected there would be some companies that could need to consider an M&A solution as they search for cash. UK electric vehicle company Saietta [LON:SED] put itself up for sale weeks before it called in administrators this year, while UK AI diagnostics company Renalytix [LON:RENX] has also launched a formal sale, following a potential approach from a suitor, amid advanced financing activities.

The first wave of UK M&A in this period of relative stability was largely powered by rehearsed deals and now the second wave of UK M&A is coming, Ord pointed out. The second wave of M&A is likely to be driven by bidders with more lead time, the need for private equity to sell and expectations of a return for the IPO markets, he said.