A wall of cash is being spent on UK companies while the pound remains at historically weaker levels, but who will be the next victim of private equity raiders?
A rocket under MITIE Group (LSE:MTO) shares today highlighted another undervalued mid-cap asset, although for the facilities manager the interest of private equity raiders had no part to play.
The FTSE 250-listed outsourcing giant rallied 12% to 92p, having raised its end of financial year earnings guidance by 7% to at least £155 million and used the strength of its balance sheet to announce a new £50 million share buyback.
Mitie’s spectacular gain, which propelled its valuation to the highest level since summer 2018, followed recent sessions in which M&A activity has been the trigger for big mid-cap price rises.
This included Friday’s surge for vet products firm Dechra Pharmaceuticals (LSE:DPH) after Swedish private equity firm EQT pitched its £4.6 billion takeover proposal at a chunky 50% premium.
Dechra shares jumped by more than a third but are still considerably short of the 4,070p proposed takeover price in a sign that the market thinks the deal won’t complete.
That’s despite EQT’s animal health experience through ownership of IVC Evidensia, Europe’s largest veterinary practice group, and the potential for synergies that other private equity firms might not be able to replicate. It is also backed by the Abu Dhabi sovereign wealth fund.
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Broker Liberum believes the price should be acceptable to shareholders in the event a full offer materialises. “We think the deal looks to be a good price, with the deal multiple at a 15% premium to Zoetis, the global animal health market leader.”
Other M&A developments this week saw oil engineering consultancy John Wood Group (LSE:WG.) open talks over a 240p a share or £1.7 billion deal with Apollo, having resisted a string of previous approaches from the private equity giant.
The buyout firm is also circling Hut Group business THG (LSE:THG), while Middle East payments specialist Network International has said it is minded to accept a 387p a share, or £2 billion proposal from a private equity consortium including CVC Capital Partners.
In addition, London-based estates firm Industrials REIT last week formally agreed a takeover worth £511 million with US giant Blackstone.
The developments have helped the FTSE 250 index add 5% since the end of March as investors look at how else private equity raiders might deploy their vast resources at a time when the pound exchange rate remains favourable.
A list by Canaccord Genuity analysts published in the Times on Saturday suggests some of the biggest companies in the FTSE 250 are potential targets, including ITV (LSE:ITV), Dunelm Group (LSE:DNLM) and Pets at Home (LSE:PETS) as well as Watches of Switzerland Group (LSE:WOSG), Softcat (LSE:SCT) and WH Smith (LSE:SMWH).
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The read-across from the Dechra proposal has already contributed to a 7% jump for shares in AIM-listed CVS Group (LSE:CVSG), which owns 500 veterinary surgeries in the UK, Netherlands and Ireland, over the past week.
In today’s session, the momentum for Mitie shares came as the outsourcing company reported fourth-quarter revenue growth of 10% when excluding Covid-related work in 2022.
It said it continues to benefit from contract repricing, new work with customers such as Eurostar and higher project revenues, alongside the contribution from recent acquisitions.
In addition, momentum from margin enhancement initiatives including increased synergies from its transformational Interserve acquisition should continue in 2024. Liberum today raised its target price from 93p to 97p and said a revised 2023 price/earnings multiple of 9.8 times looked to be undemanding.
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