With M&A increasing, what does this mean for UK PLC?
As winter draws in, there is a chill being felt in PLC boardrooms which has nothing to do with the weather. UK equities are increasingly coming into the focus of international predators, with both strategic and private equity investors dusting off their playbooks.
What is driving this?
A number of factors are combining to make UK equities look increasingly attractive:
- Politically, the UK is on more stable footing. Labour has secured a substantial majority and has actively indicated that the UK is open to investment. Whilst this is not an open call for de-equitisation, in fact far from it, its public stance has dispelled concerns that the more left-wing elements of the party will seek to block transactions as a matter of principle.
- Regulatory, the introduction of the FCA’s new Listing Rules, adopted in July, has effectively put the UK on a more level playing field with other major international capital markets in terms of the cost, speed and certainty of undertaking transactions. In short, corporate carve-outs can now be delivered with much less friction (and without a costly shareholder vote).
- Interest rates, arguably the biggest driver is that the painful post-Covid cycle of interest tightening is now in reverse – and the greater than expected cut from the Fed in September, alongside other interest rate loosening elsewhere in the world, has increased confidence that larger deals can be financed – something we are already seeing in the recent tick-up in FTSE 350 approaches.
- It’s not just the banks: Alongside traditional lenders, there is an abundance of alternative financing opportunities now being made available by non-bank credit providers – meaning that bidders have more options and greater pricing power
- Fire power: Finally, balance sheets have been rebuilt, whilst a prolonged period of deal inactivity has left potential predators with a record amount of ‘dry powder’ – and an appetite to use it.
Taken together, it’s not surprising that we are starting to see momentum build. At the start of October, 5% of FTSE 350 constituents were in public M&A situations, compared to just 2% this time last year.
Does this mean the continued de-equitisation of London?
With a still sluggish (but thankfully recovering) IPO market, and a number of high-profile relisting moves to the US, it raises the question of whether we are seeing the slow death of London as an equities powerhouse? It’s a narrative that readily writes itself into the UK newspapers, which you have no doubt read, but it is overdone. First, whilst maintaining their fiduciary duty, more Boards are showing a willingness to push back. Second, investors are speaking out against companies being bought on the cheap. In fact, to get some deals over the line, bidders have been forced to pay premia of over 80% – and, in one case, of 100% (against a longstanding norm of 30-40%). We have also seen a number of high profile failed approaches.
How to avoid becoming prey
Preparation remains key. The old adage that “Everyone has a plan until they get punched in the face” holds true. Accordingly, companies are increasingly looking beyond the more
formulaic defence guides and assessing how they would respond at pace and it real time so that they can get on the front foot now.
Evolution of IR
There has been an increased focus on companies telling their IR story more effectively and broadly – leveraging digital channels and paid-for campaigns to target investors, alongside drumbeat financial media activity, to ensure their investment case is widely heard and understood. This is to build a clearer understanding of how the strategy will drive value in the event of an unsolicited bid, and enable companies to reference materials that are already in the public domain. “As we said before…” is always more powerful than: “Here is new information that we are now opting to share with you….”
Stakeholders as well as shareholders
Alongside this, Boards are increasingly looking to utilise every lever at their disposal to deliver an effective defence should an approach become public – from harnessing advocates among the media, local and national politicians, their own employees and employee representatives, and even their key customers and suppliers. Gone are the days when a battle is simply fought on price – building these relationships in peacetime is critical. It is worth noting the same applies to bidders too: as evidenced this year in the time and effort expended on preparing the ground among wider stakeholders for the takeover of the owner of Royal Mail.
Boards take note: If you are not engaging effectively with your stakeholders, a future potential owner may be doing so already.
The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
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