By Joice Alves and Sujata Rao
LONDON, Aug 16 (Reuters) - This year's unprecedented private
equity buying spree in Britain is causing unease among
politicians, trade unions and investors, about potential job
losses and rising debt.
But generous price premia are also raising asset managers'
expectations of higher share prices for the London stock market
after years of underperformance.
An $9.5 billion bid underway by Fortress Investment Group
for British grocery chain Morrisons is just one such
private equity acquisition, which, according to Lazard Asset
Management, have accounted for 85% of British take-private deals
this year.
Here are five charts showing private equity's hunt for
UK-listed corporates.
1/RECORD RAIDS
Buyout groups spent $45 billion snapping up companies in
Britain in the first half of 2021, Refinitiv data shows, more
than double the next best first six months on record and almost
10% of the total $547 billion they spent across the world.
Peel Hunt data in July showed 38 London-listed companies had
either been acquired by private equity this year or were in the
process of being acquired. Apart from Morrisons, these include
Dubilier & Rice and KKR's acquisition of infrastructure firm
John Laing Group.
The deals keep coming with Advent-owned defence firm Cobham
agreeing on Monday a $3.6 billion takeover of Ultra Electronics
, while CVC and London-listed Stock Spirits
announced a roughly $1 billion deal late last week.
Grace Peters, EMEA head of investment strategy at JPMorgan
Private Bank called private equity interest in UK companies
"comforting", saying that when you invest in equities "you want
to know there is an incremental buyer".
2/FOR SALE, CHEAP COMPANIES
The attraction for cash-rich private equity is obvious.
While U.S. and European stock indexes have
gained 65% and 25% respectively since August 2018, the FTSE 100
index is down 8% and trading at just 12.6 times forward
earnings. That compares to 21 times and 16.3 times respectively
for the U.S. and European benchmarks.
British stocks' discount to global peers is the deepest in
over three decades.
Brexit is one reason. The mining, energy and banking shares
typical of the FTSE 100 have cheaper valuations than tech as
their performance hinges on a clearly positive growth outlook.
But even smaller, domestically focused British stocks
, trading at 13.2 times forward earnings, lag the U.S.
midcap average of 17.6 times.
Janus Henderson portfolio manager Tom O'Hara says UK
valuations are often unjustifiably cheap even when companies are
hugely cash-generative.
"UK for sale is very much an ongoing theme and it will
remain so until the market becomes a lot better valued," he
said. "If the market refuses to value a company appropriately,
private equity will come and take it off your hands on the
cheap."
3/NOT THAT CHEAP?
Shareholders in Morrisons will reap a 40%-plus premium
should its buyout proceed at 270 pence per share - in line with
the average premium offered this year by private equity firms,
Peel Hunt analysis shows.
4/PUBLIC TO PRIVATE
The laws of supply and demand dictate that take-private
deals will support share prices by removing equity from the
market, even if the amount withdrawn is dwarfed by the 2.4
trillion-pound FTSE 350 index.
Companies taken private from January to July represented 11
billion pounds in market cap, Peel Hunt estimates. That will
rise to more than 26 billion pounds and remove almost 13 billion
shares from the public market if all the deals announced in the
period complete.
"There's a lot of money coming back in for fund managers to
deploy, and a lot of that will be repositioned in companies
currently listed in the UK or provide firepower for fundraising
for IPOs," said Charles Hall, Peel Hunt's head of research.
There is unease too. Kiran Ganesh, London-based head of
multi-asset at UBS Global Wealth Management, cautioned that
policymakers need to ensure "the best opportunities don't go
private and public markets are just what's left over".
ARBITRAGE
Buyouts are creating what Justin Onuekwusi, portfolio
manager at Legal & General Investment Management, calls
arbitrage opportunities between public and private markets as
investors jostle for shares in potential takeover targets.
"Allocating to the cheaper asset classes will eventually pay
off if you're willing to be patient," he told the Reuters Global
Markets forum.
The Morrisons deal has lifted shares in rivals Sainsbury's
and Tesco, while Berenberg analysts have a Buy rating on listed
real estate companies Capital & Counties, Helical
and Grainger as it considers them attractive to
private equity buyers.
Janus Henderson's O'Hara holds several companies with
valuations he reckons make them attractive takeover targets,
including Premier Inns operator Whitbread, Sainsbury's
, chemicals firm Johnson Mathey and DIY firm
Kingfisher.
"It's a simple case of financial arbitrage being left open
by the market," he said.
(Reporting by Joice Alves and Sujata Rao, additional reporting
by Abhinav Ramnarayan; Editing by Kirsten Donovan)
