Two FTSE 100 firms have already been acquired in 2018 (both were founder members of the index in 1984), a third looks set to go and two more face contested bids, while the mid- and-small-cap ranks are also being targeted
Five further companies could all become a takeover target in the coming months, especially if the pound weakens further following the Bank of England’s latest policy flip-flop
While such rapid returns can be welcome, investors need to stick to their stock-picking disciplines – and also ponder whether the rush of deals is a warning sign that a market top is imminent
“A possible bidding war for serviced offices provider IWG would be merely the latest takeover drama that has enlivened the UK stock market in 2018 and in the process enriched investors, who could now be forgiven for trying to identify the next potential targets for a predator, especially as the latest decline in the pound means British assets are cheaper for overseas buyers,” says Russ Mould, AJ Bell Investment Director.
“In 2018 alone, five FTSE 100 firms have been the subject of bids.
“GKN and Ladbrokes (via the merged LadbrokeCoral business), both founder members of the FTSE 100, were snapped up by Melrose and GVC respectively. In addition, Sky has received a further bid, this time from America’s Comcast, while another firm based stateside, International Paper, is bidding for Smurfit Kappa while Japan’s Takeda is looking to close out its approach for Shire after making five offers for the drug developer.
“Add in CME’s bid for NEX, a lunge for Fenner by Michelin on France, private equity bids for ZPG and CityFibre, Informa’s purchase of UBM and the proposed CYBG-Virgin Money deal and investors may be able to spot a few trends within this wave of activity that can help them spot the next deal and perhaps make a tidy profit – notably overseas interest, consolidation in the telecoms, banking and betting industries and share price declines (in sterling terms) among them.
“In view of the combination of their competitive position, the rarity of the assets they control, their balance sheets, their shareholder structure, the nature of the industry in which they work and the valuations they currently command it is possible that the following five companies could all become a takeover target in the coming months.”
1. ITV has an unrivalled position in the UK free-to-air broadcast arena with its ability to attract mass market audience and blossoming content catalogue. The 9.9% stake held by Liberty Global, the US-based owner of Virgin Media, means talk of a bid will never be far away, especially now the company has just raised €18 billion via the sale of cable TV assets in Europe. Fears over a post-Brexit advertising slowdown still weigh on the shares, which also took a dive after Dame Carolyn McCall’s maiden set of full-year figures, as they came with extra investment in programming and without a special dividend.
2. OneSavingsBank. After bids for Aldermore and Shawbrook and the proposed merger between CYBG and Virgin Money it will be interesting to see if another challenger, One Savings Bank, draws an approach. OneSavingsBank offers a high return on equity and good growth in its loan book, but the market remains competitive and tightly regulated and the end of the Bank of England’s Term Funding Scheme could put some pressure on margins on the retail loan book.
3. SSE. The Competition and Markets Authority intends to investigate the planned merger of SSE’s retail energy supply business with nPower’s UK retail electricity supply businesses but if it goes ahead SSE will be left with a business energy supply and services business and the ownership of energy and infrastructure assets. This mix may appeal to both financial buyers in the infrastructure space who are seeking the yield and cash flows which can be offered by a mature, defensive, regulated business and also European utilities who may be looking to reshape their operational portfolios.
4. TalkTalk. A private equity bid for CityFibre brings the telecoms industry back into the spotlight, especially as the dogfight between Sky, BT, Vodafone, Virgin Media, Talk Talk and others goes on unabated. A dividend cut and enhanced investment programme have both weighed on TalkTalk’s share price, as newly-returned chairman Sir Charles Dunstone has sought to reinvigorate the business’ growth. He still has a big stake in the company he founded during his Carphone Warehouse days and Sir Charles’ record makes it clear that he is not afraid to buy or sell assets.
5. William Hill. The UK regulator’s decision over the maximum stake allowed for Fixed Odds Betting Terminals still hangs over shares in FTSE 250 bookmaker William Hill but Hills has a terrific foothold in the USA, helped by a trio of acquisitions it made in 2011. The US Supreme Court’s decision to open up and legalise sports betting in the USA means William Hill has an excellent position in a potentially massive market since the company is already the leading regulated player in Nevada. That may put Hills in someone’s sights, especially as three of the Big Four of UK betting of the 1970s and 1980s – Ladbrokes, Corals and Mecca – are no longer independent and the new Big Four of Paddy Power, Bet365, GVC and Stars could leave Hills looking outgunned, especially in the online market. The highly cash-generative business has had six different owners since the death of William Hill himself in 1971, starting with retail group Sears (1971), Grand Metropolitan (1988), Brent Walker (1989), Nomura (1997), a private equity consortium (1999) and then its shareholders after the 2002 flotation on the London Stock Exchange. It nearly found a seventh in 2016, only for a joint £3 billion bid from 888 and Rank to founder.
“One word of warning, however, to anyone trying to find a company that may be acquired.
“Buying a stock purely on the basis of a bid can be a dangerous game. Lots of investors have been waiting for a successful bid for RSA for over a decade – and they are still waiting. In addition, any potential buyer would rather get a bargain, so they may wait for a short-term blip or problem to develop before lunging.
“Any potential ‘bid candidate’ play in a portfolio must therefore still meet all of the investor’s initial screens, so it is fits with their overall investment strategy, time horizon, target returns and appetite for risk. Investors must feel the firm is a good pick in its own right – and any bid will therefore simply be a bonus.
“And welcome as bids can be, investors need to be careful for another reason.
“Hot merger and acquisition activity can often be a sign of an overheated market that may be nearing its peak. This may be because management teams
Can sense that growth is flagging and they need to do something to spice things up
Feel their own shares may be overvalued and could thus make a good acquisition currency
Are getting caught up in a bull market as animal spirits start to run and simply lose their valuation and capital allocation disciplines
“With five FTSE 100 firms already bought or the subject of an approach, three more outlining break-up or demerger plans (Old Mutual, Prudential and SSE) and two lining up major purchases (Sainsbury and Vodafone) 2018 is the busiest year for FTSE 100 M&A since 2007 - when Corus, ICI, Boots, Hanson, Scottish Power and Gallaher all drew bids.
“It was also when the FTSE 100 peaked, just ahead of the Great Financial Crisis.”