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Aim's a hot target too

In many respects the main London stock market and its unruly younger sibling Aim aren't nearly as chalk and cheese as they have sometimes been portrayed.

Both have been enjoying a boom in new listings and a surge in takeover activity. In fact, in the year to date takeovers on Aim have hit a 14-year high, and in 2020 Aim takeover deals made up more than half of all London Stock Exchange deals.

Ready availability of cash alongside cheap financing, bargain valuations and, for trade buyers, the opportunity to create operational and financial synergies are all factors driving the current takeover spree.

The Aim takeover trend is one that my colleague Simon Thompson believes is likely to continue given that private equity firms are sitting on more than $2tn of “dry powder”, ready to pour into new investments while London’s attractive prices mean future deal flow looks well underpinned. International predators, private equity and trade buyers will continue to circle, he says, and are likely to become more focused on exploiting valuation discrepancies for companies exhibiting strong earnings recoveries, with the added benefit of parking their capital in an asset likely to benefit from currency appreciation as the Bank of England tightens monetary policy.

The Aim constituents of Simon’s Bargain Shares Portfolios have not directly benefited from M&A activity in recent years, but he always considers the possibility of a takeover. “It plays a part in sector ratings which in turn supports valuations,” he says.

IC columnist John Rosier agrees and, while he never buys a company for its takeover potential, he hopes that the valuation he buys at will eventually be recognised by the market as being attractive. “If that happens to be a trade buyer, then fine.”

The prospect of a takeover, however, is now in the back of his mind for exploration and production companies he holds – such as Serica Energy, and (non-Aim) Lundin Energy, and he can envisage situations where a buyer might emerge. “I think both companies are valued much more attractively than they would have been 10 years ago, due to the many institutions and funds divesting, selling and avoiding oil and gas. Might a consolidator or private equity buyer be interested in buying a stream of cash flow on the cheap?”

Those attractive E&P valuations have, he points out, been exploited by consolidators in the industry such as DNO’s takeover of Faroe Petroleum, Ithaca Energy’s by Delek  – both of which John held – and RockRose by Viaro, a company he sold out of weeks before the deal was announced. “With hindsight, I should perhaps have seen that coming given the cash flow characteristics of RockRose at the time.”

Simon’s top sectors in terms of attractiveness to buyers are the financial and real estate sectors, while he sees takeover potential in some of the lowly rated value plays of his Bargain Shares Portfolios – for example, consultancy group Driver, land regeneration group Inland, Scottish housebuilder Springfield Properties and credit hire and legal services Anexo.

John Rosier agrees that there will be many more takeovers in the UK while valuations continue to look cheap relative to overseas markets “but with only around 20 positions in my portfolio, four of which are investment trusts, I’ll be lucky to receive one”.

But not all bids are welcomed. Chinese company and production partner Ganfeng’s battle for Aim-traded Bacanora Lithium has provoked a backlash from hundreds of shareholders, who argue that the bid is opportunistic and grossly undervalues the company. The Bacanora Investors Group, which has the backing of ShareSoc, is urging fellow shareholders not to accept the current offer and to hold out for a better price.

Look out for Part two of our Aim 100 analysis which will appear in two weeks time in the issue dated 19 November when we’ll be counting down from 50 to 1. Next week's issue dated 12 November is our annual Investment Trust special