- Value of all completed plc takeovers more than doubles to £61.8bn
- Of 17 contested deals, 14 involved a private equity bidder
The value of takeovers of listed companies in the UK more than doubled to £61.8bn in 2021, fuelled by a growing appetite for assets from private equity buyers.
The biggest plc takeover to complete last year was the £7.28bn buyout of RSA Insurance by a pair of competitors – Canada’s Intact Financial (CAN:IFX) and Denmark’s Tryg (DEN:TRYG). It was followed by US private equity firm Clayton, Dubilier & Rice’s £7.1bn take-private of supermarket chain Morrisons, new data from Peel Hunt shows.
The Morrisons buyout was part of a broader trend of UK-listed entities being taken off the market by private equity firms – 49 per cent of takeovers of companies on the London Stock Exchange last year were by a private equity buyer, compared with just 30 per cent three years earlier. The flood of capital into private equity funds means they are also eyeing up ever-larger targets.
“Those big beasts of private equity – KKR (US:KKR), Apollo (US:APO), Carlyle (US:CG) and so on … have these huge funds to deploy,” said Peel Hunt’s head of M&A, Michael Nicholson. “If you're a fund of that size, you need to invest in an investment of a certain size for it to have any meaningful effect on your portfolio.”
Dry powder piles up
Globally, the five biggest private equity (PE) funds had almost $510bn (£379bn) of ‘dry powder’, or undeployed funds, in August last year, according to an S&P Global Intelligence report using Preqin data. The total amount of dry powder held by PE firms stood at almost $2.3trn - a 44 per cent increase on the $1.6trn held just two years earlier, according to law firm White & Case.
Private equity companies had hitherto typically shied away from takeovers of listed targets because success rates were much lower, said Jonathan Boyers, head of KPMG’s UK corporate finance practice.
PE firms get limited access to public company management or information before they table a bid and they have to pay a hefty premium to the price at which a company’s shares trade before an approach is announced. Even if they then manage to get the company's board and its main shareholders on side, they run the risk their bid will be trumped once the offer is made public.
The wave of capital into private equity coffers has pushed up the multiples for deals involving unlisted companies, however, leading many firms to attempt more take-private deals, as well as taking more minority stakes in target companies, said Boyers.
More than $110bn of private equity buyouts were completed in the UK last year, up from $31.6bn in 2020 and $42.7bn in 2019, according to Preqin. The average deal size also swelled to $143m, compared with just $60m a year earlier and $73m in 2019.
The signs of competition spilling into public markets are clear. Last year, 17 plc takeovers involved competitive bids, compared with just four in 2020 and three in 2019, according to Peel Hunt. Of these, 14 involved at least one private equity bidder.
UK companies have also been targeted by the big US PE firms as they are more competitively priced. The S&P 500 index still trades at 20 times earnings despite its recent sell-off, whereas the FTSE 250 is valued at 15 times.
Market fluctuations have “resulted in more listed companies being undervalued as investor sentiment has changed fairly quickly in recent years”, said Chris Locke, strategy and transactions partner at EY.
Whether the heightened interest by private equity firms in publicly-listed companies will persist depends on how shares perform, and “the delta in pricing between performing and non-performing stocks in the same sectors”, he said.
The uncertain economic outlook faced by many companies battling supply chain disruption and cost inflation leads Peel Hunt’s Nicholson to believe that it will.
“If you’re not able to pass on those cost increases efficiently to your end customers, you’re not necessarily going to be reporting stellar results,” he said.
Investors’ differing views on how long they're prepared to wait for companies' margins to improve could lead to the type of valuation gaps on which private equity firms often look to capitalise, he said.
No easy wins
Listed companies are unlikely to be a source of easy pickings, though. As well as the threat of being trumped by a competitor, private equity buyers are facing greater resistance from institutional shareholders if they believe bids are undervalued.
Opposition from Fidelity and Toscafund last year led to Ramsay Health Care’s proposed £1bn takeover of Spire Healthcare SPI) becoming the first offer recommended by a company’s board to be turned down by shareholders since 2012. Several other deals, including bids for AFH Financial and UDG Healthcare, had to be renegotiated before eventually proceeding, Peel Hunt’s report said.
Moreover, the same flood of funding from which private equity firms have benefited has also bolstered hedge funds that pursue activist strategies, Boyers said. Hedge funds’ assets under management grew 8.1 per cent to $4.32tn as of September last year, according to Preqin.
“We are seeing more and more activist investors who want to be more involved in steering the outcome,” Boyers said.
