Four firms vulnerable to bids during this M&A boom

High-quality UK firms have always been popular takeover targets, but current circumstances make them particularly attractive.

The de-rating of the FTSE 250 index to a 10-year low means investors can expect no let-up in mid-cap takeovers after a flurry of deals ranging from Biffa (LSE:BIFF) to Go-Ahead Group (LSE:GOG).

Ten FTSE 250 companies are currently the subject of bid interest worth £14 billion, with five FTSE small-caps and four on AIM also targeted in deals of at least £100 million.

The pace has quickened in recent weeks as depressed valuations look particularly attractive to private equity bidders with cash piles to deploy and a longer-term outlook.

City bank Peel Hunt said there have been 14 proposed and announced bids in the past six weeks alone, including the approach from US-based Energy Capital Partners for waste collection firm Biffa and this week’s Australia-led deal for transport group Go-Ahead.

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Some of the activity may not get over the line as FirstGroup, THG (LSE:THG), Countryside Partnerships (LSE:CSP) and Mediclinic (LSE:MDC) have rejected offers, although Countryside remains in a sale process.

In a note examining the developments, Peel Hunt said the interest was unsurprising given that the FTSE 250 is down 18% year-to-date and 80% of its constituents are in the red for 2022.

It notes that London’s second-tier benchmark is trading on a price/earnings (PE) multiple of 12.5 times, a 10-year low that compares with a peak of 17 times less than a year ago. The FTSE Small-Cap rating has gone from about 15 times last year to below 10 times.

Peel Hunt said: “It is no wonder that UK businesses are attractive to a broad number of acquirers, with the FTSE 250 a particular focus given the greater dynamism among the constituents, as well as being a manageable size.”

The current focus for bidders has been on hard assets, particularly companies with strong market positions and clear and lasting cash flow credentials. Sterling weakness has added to the appeal for overseas bidders.

Peel Hunt described current interest from non-equity investors as a “classic indicator of a disconnect between short-term concerns and longer-term opportunity”.

As we reported yesterday, Peel Hunt sees the house building sector as ripe for potential takeover action after an average fall in share prices of 25% so far this year.

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It added that valuations have dropped sufficiently to make four firms vulnerable to bids.

The sector has been trading on 1.18 times net asset value, which compares with a 10-year average of 1.49 times. Prior to their positive updates yesterday, Crest Nicholson (LSE:CRST) traded with the biggest discount on 0.71 times followed by Bellway (LSE:BWY) on 0.75 times. Redrow (LSE:RDW) and Springfield (LSE:SPR) are also seen as vulnerable at 0.82 and 0.98 times respectively.

There have already been eight significant private equity-led deals in the sector since early 2021 and Peel Hunt said yesterday it wouldn’t be surprised to see more, including from private equity firms looking to build on earlier acquisitions in the sector.