The UK is set to see another wave of mergers and acquisitions in the second-half of the year as dealmakers hunt for targets in one of the world’s cheapest equity markets.
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(Bloomberg) — The UK is set to see another wave of mergers and acquisitions in the second-half of the year as dealmakers hunt for targets in one of the world’s cheapest equity markets.
British companies represented more than 60% of the names mentioned at least twice as the most likely M&A targets, according to an informal survey of 14 European risk-arbitrage desks, traders and analysts conducted by Bloomberg News in June. This includes names such as food delivery platform Deliveroo Plc, electronic retailer Currys Plc and engineering specialist Dowlais Group Plc.
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The pick-up in the number of UK deals this year has been mainly driven by cheap valuations, with the UK stock market now trading at a 42% discount to the MSCI World. The deal volume is almost double the size compared to the whole of last year, according to data compiled by Bloomberg, with political stability from the new Labour government likely to further support the M&A spree.
Overall, German chemical group Covestro AG was the name most often mentioned in the Europe-wide poll. Takeover interest from Abu Dhabi National Oil Co. first emerged in June last year, with Citigroup Inc. analysts describing the deal as “very likely” at a higher offer price of €62 per share.
Dowlais, Vivendi, Covestro and Deliveroo declined to comment. Currys wasn’t immediately available for comment.
Foreign bidders have been active in the UK over the last few months, with Carlsberg AS agreeing to buy soft drinks producer Britvic Plc for £3.3 billion (€3.9 billion) this week. Royal Mail owner International Distribution Services Plc, cybersecurity firm Darktrace Plc, packaging giant DS Smith Plc and logistics business Wincanton Plc are among the companies to have been snapped up or accepted offers this year.
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Chris Forgan, portfolio manager at Fil Investment Management Limited, also anticipates foreign capital will flow back to the UK following greater political stability following Labour’s landslide victory in the July 4 election.
“A level of optimism has also returned to the M&A sector,” Forgan said. “Corporates are looking to take advantage of this, and deals are happening at attractive premiums.”
Investors are expecting renewable energy firms to draw buyers under a Labour government, given the party’s focus on propping up the sector.
If more clean energy deals happen in the UK, this will be a continuation of a similar trend underway in Europe, with Abu Dhabi firm Masdar agreeing to buy Greece’s Terna Energy SA in a €2.4 billion ($2.6 billion) deal. Alternative asset manager Brookfield is leading an investor group moving toward a €6.1 billion takeover of French renewables producer Neoen SA.
Overall, there have been almost $123 billion worth of pending and completed M&A deals targeting listed European companies so far this year, with the UK accounting for around $43 billion, according to data compiled by Bloomberg.
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With all the positivity around UK deals, there are some factors that could slow the momentum. Merlin Piscitelli, chief revenue offcer at Datasite, thinks there may be a pause in cross-border deals until the US election takes place in November.
In addition, bidders will be under greater pressure to offer more money for higher quality UK companies, such as pension investment platform Hargreaves Lansdown plc, said Alexandra Jackson, manager of the Rathbone UK Opportunities equities fund.
“As flows return to the UK, institutions will feel more confident to push back, and keep hold of these trophy assets,” Jackson said.
—With assistance from Julien Ponthus.
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