On Thursday, domestic repairs firm HomeServe Plc agreed to be bought by Brookfield Asset Management for £4.6 billion including assumed net debt. HomeServe shares had tumbled so much that the offer didn’t match their pre-bid one-year high despite its 71% premium.
Days earlier, KKR & Co. secured a £4.9 billion deal to purchase ContourGlobal Plc, offering shareholders a smidgen above the price of the utility’s 2017 initial public offering. The shares have traded below that level for the last four years. Founding shareholder Reservoir Capital Group, still with 71% of the business, has given the thumbs up.
UK assets are a lot more affordable now for dollar-based funds. The pound is down more than 10% against the greenback since May 2021. The FTSE 250 index of midsized companies (whose constituents are conveniently sized for buyouts) is down over 25% in dollar terms from its September peak. That’s almost as much as the Nasdaq Composite’s fall from its recent high.
Morgan Stanley analysts reckon the UK market is extremely cheap on a historical basis. Last month, they looked at the multiple of earnings at which shares have traded at since 1980 (adjusting for the economic cycle): UK stocks were at roughly 1% below their average, US stocks 58% above.
Whatever the macro conditions, a buyout firm’s primary focus will be on whether an individual asset generates sufficient cash to service the debt used to acquire it. That box looks to be easily ticked. Graham Simpson, analyst at Canaccord Genuity Quest, recently identified 255 London-listed stocks with a market capitalization under £1.5 billion that were generating extremely attractive levels of free cash flow relative to their market enterprise value.
“The days of buying failing companies and turning them around or asset-stripping are over,” Simpson says. “That’s way too much work. Why not just buy the good companies at bargain basement valuations instead?”
The question is whether shareholders will be willing to sell what private equity wants to buy. Right now, resistance is probably falling.
Given the deal for ContourGlobal, plus some rejected approaches for beauty and nutrition retailer THG Plc, consider the UK’s recent crop of poor-performing new issues. A year after listing, hopes of seeing the IPO price again will likely have faded, and some of the original investors will have been replaced by new shareholders with lower expectations. Founders or others with very big stakes might object, but they could be offered to chance to stay invested in the buyout.
The main obstacle is probably the challenged situation of most of the other sunken IPOs. Food delivery firm Deliveroo Plc listed as a pandemic beneficiary but now looks exposed to the squeeze on discretionary spending. Rail-tickets vendor Trainline Plc got hit by a regulatory asteroid threatening its dominance in the UK, putting more reliance on Europe for future growth. TI Fluid Systems Plc needs to reinvent a business that has traditionally supplied parts for internal combustion engines.
Others among the dud IPOs were bizarre members of the UK market from the get-go. Semiconductor company Alphawave IP Group Plc chose London despite its Canadian origins. It has come under fire over related-party transactions. Network International Holdings Plc, meanwhile, is a Middle East and African payments business with no revenue in Europe.
What about investor resistance in the wider UK market? Last year, investors started to say no to bids — or demand higher offers — in spite of recommendations by the target company’s board to take the private equity lucre. Shareholders squeezed sweeteners from Blackstone Inc. and Clayton Dubilier & Rice LLC.
The difference this time is that stock markets are much weaker. Bids are going to be increasingly attractive to asset managers as the year-end approaches and they’re seeking to boost their annual returns. For private equity, still sitting on a lot of cash and incentivized to put it to work, it’s going to be tempting to test the waters.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
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