As London waits for a boom, which companies could be takeover targets?
Wars, inflation and high interest rates killed takeovers in 2023, but bankers believe buyers and sellers were simply biding their time — and the rainmakers will be back as the economy improves
It is not uncommon for the cafés and restaurants in the Square Mile to struggle in the first week of January as the City’s high-rolling dealmakers snub London’s grey skies in favour of the ski chalets of Courchevel.
This week, however, London’s rainmakers are back. And after a dismal 2023, there is plenty to be optimistic about, according to one of the UK’s top investment bankers: “People will be waking up with a little more spring in their step.”
Global company takeovers — the fuel of the City’s money-generating engine — sank last year as concerns over the Ukraine war, soaring inflation, rising interest rates and weak consumer sentiment stymied mergers and acquisitions (M&As).
The value of deals last year totalled $2.9 trillion (£2.3 trillion), down from $3.6 trillion in 2022 and $5.3 trillion in 2021, according to the London Stock Exchange Group. You have to go back to 2014 to find a year when deal values were lower.
However, while the world’s economic woes are far from over, bankers insist that dialogue between buyers and sellers continued even during last year’s M&A malaise. The problem was getting all parties to agree on price, said Stephan Feldgoise, co-head of global M&A at Goldman Sachs.
But now, amid hopes that the worst of the inflationary pressures are over and that central banks will this year begin cutting interest rates, M&As could have the wind in their sails, according to Kirshlen Moodley, UK head of advisory at BNP Paribas.
And, he said, with City movers and shakers grumbling that UK companies appear cheap compared with their counterparts overseas, Britain may indeed be “up for sale”.
Christopher Jones, managing partner at Clearwater International, said: “There is a huge backlog of assets that are being readied for sale in 2024 — our sellside pipeline is by far the largest it has ever been. In many instances the owners of these assets have put their plans on hold for four or five years and can’t /won’t wait forever. There are a great many private equity-owned assets that were bought 2015-18 and are now long in the tooth. The investors need to exit as the funds the assets sit in are being run off, and after so many years management teams need to catalyse succession and create liquidity.”
There are also reasons to be optimistic about the public markets. Moodley said that the cost of debt may start to come down and that this, combined with a more stable economic outlook, will allow suitors for listed companies to make higher offers that are hard to refuse.
“When we talk to clients, they want to start doing things,” said one senior investment banker.
Moodley pointed out that activist investors will be alive to this and could pile fresh pressure on City boards to sell.
Private equity has already made its intentions felt. Take Apollo Global Management’s £500 million take-out of The Restaurant Group, the London-listed company behind Wagamama. Not only did the Wall Street fund provide the equity for the deal last autumn, but it took on more than £100 million of the debt alongside Royal Bank of Canada in a “hybrid” deal.
In other words, if private equity cannot find the banks to offer the lending, they are increasingly likely to provide it themselves.
“I think you will see more of that. There are enough hybrid funds out there,” said one banker.
Some American bankers, such as Feldgoise at Goldman Sachs, are convinced that the gloomy 2023 was an outlier.
“If you look at M&A as a percentage of GDP, which is a common statistic, it’s been running 2 to 3, maybe 3.5, per cent over the last year,” Feldgoise said last week. “If you look back over 20 or 25 years, it generally runs in the 5 per cent range.”
The City commuters returning from their New Year jaunts this week will be hoping that this optimistic view holds true.
Which British stocks might be targets?
Analysts at Quest, owned by investment bank Canaccord Genuity, have come up with a way of rating stocks based on how dealmakers would look at a company. Their method works out how much of a financial return you could make from a business based on its cashflow, factoring in the cost of acquiring it.
Here are some of their top picks among the FTSE’s larger companies.
Centrica
The British Gas owner has had a strong 12 months, with its shares surging by nearly 65 per cent on buoyant energy prices. In recent years, it has restructured and strengthened its balance sheet, leaving it the tricky problem of where to invest its excess cash.
Quest reckons Centrica is severely undervalued, in part because it is generating so much cash.
Last month, indeed, analysts at UBS noted that the company could have up to £1.9 billion of spare liquidity to deploy this year, on top of what it has set aside for share buybacks and other growth projects. Precisely because of its strong cash position, Quest also puts Centrica top of the list of potential large-cap acquirers in the sector.
Harbour Energy
The North Sea oil and gas company was clobbered by the government windfall tax last year, so has set its sights on expanding beyond the UK. Last month, it announced the $11 billion takeover of Wintershall Dea, which could double the size of the company. Wintershall, a German-based rival, has assets in Norway, Argentina and Mexico.
Quest analysts reckon Harbour itself could be a tasty target, even before that deal completes. As well as funding $2.1 billion of the deal from its own cashflow, Harbour has paid out $440 million in dividends in the past year, and has said it could be debt free in 2024.
Easyjet
Airlines are often a hard sell for dealmakers. Pinning a valuation on a business that is so dependent on oil prices — a cost largely outside management’s control — is no mean feat. Nevertheless, speculation has swirled for some time that easyJet is vulnerable to a takeover attempt, even though the company’s share price rose by a third last year.
Despite this resurgence and its recent posting of record annual profits, the company looks cheap compared with competitors such as Ryanair. This — plus the fact that easyJet owns lots of valuable assets, such as its aircraft — puts the Luton-based carrier at number three on Quest’s list of big-ticket takeover targets.
Indivior
In some ways, Indivior sits awkwardly on the FTSE. In previous years, the pharmaceutical company, which was spun out from consumer giant Reckitt Benckiser in 2014 and makes treatments for opioid abuse, has made about 80 per cent of its revenues in the US. Last summer, Indivior took the plunge and crossed the Atlantic, taking a secondary listing on the Nasdaq exchange.
Since the dual listing, the shares have fallen by about 30 per cent on both the London and New York markets. In its last set of results, Indivior reported a 21 per cent jump in revenue.
Serco
Serco’s history on the London market has not been without turbulence. The outsourcing giant provides everything from asylum accommodation to security services, but found itself in freefall about a decade ago, when it was found to have overcharged the government for its services.
Its share price, which is three per cent up on last year, has never fully recovered from the subsequent dive, making it attractive for private equity barons. And the business has also gone through a major shake-up, disposing of scores of peripheral divisions, making it a more focused operation. Its full-year results last month also showed that it made £170 million in free cash flow, around £20 million higher than previously expected.
Wise
Formerly known as TransferWise, this fintech is designed to send money hassle-free across borders. Its shares have risen steadily since it listed on the London Stock Exchange in 2021, making Wise one of the few bona fide float successes of recent years. It reported half-year revenues of £500 million in November, and free cashflow nearly half that, on a customer base that is growing at a rate of 30 per cent a year. Wise has also been helped by rising interest rates.
Drax
The Selby-based power generation company started life in the 1970s as a coal -fired power station. Now, the green transition may hold hopes for its future. Drax makes electricity from biomass, crushed wooden pellets that can be burned instead of fossil fuel.
The company also has a trading business through which it sells its power. The past year has proven fruitful for the company: in December it announced £1.2 billion in earnings before interest and tax, broadly in line with what it expected. Debate continues to rage about whether it provides truly green energy or not, but the company insists it is well placed to benefit from the energy transition, and that the government recognises the benefits of biomass.
Balfour Beatty
The construction sector had little to cheer last year after Rishi Sunak axed HS2, the country’s biggest infrastructure project and major gravy train for the sector. Balfour Beatty, the FTSE-250 construction giant, has kept up a steady drumbeat of work, however. Annual revenues rose 5 per cent in part thanks to international projects such as Hong Kong airport. Net cash each month last year was about £700 million. With the windfall in the bank, the company is gearing up for a share buyback programme.