Perhaps we shouldn’t be too surprised that a German firm has tabled an offer for one of the world’s leading suppliers of sausage skins. Saria SE & Co, a privately owned multinational based in North Rhine-Westphalia, is offering shareholders in Devro (DVO) 316.1p in cash for each share held, valuing the company at £667mn on an enterprise basis. The offer represents a 65 per cent premium to the closing price on the day prior to the offer and has the unanimous backing of its board members. Shareholders will also be entitled to receive the previously announced 2.9p interim payout; the company goes ex-dividend on 1 December.
Saria is one of the three independent arms of Rethmann SE & Co, a conglomerate which has been characterised as “the largest family business in Germany”. It probably doesn’t fall within the narrow definition of a Mittelstand enterprise, but the group has a long track record of successfully integrating bolt-on acquisitions and the rationale behind the deal is easy to appreciate.
Van Hessen, one of the businesses within the Saria group's food & pharma division, is a supplier of natural sausage casings and already acts as a distributor for Devro products in certain locales. But it was Devro’s extensive research and development back catalogue and its reputation for product innovation that swayed bosses at Saria, albeit not at any price. They would have certainly been aware that the Lanarkshire company’s sales volumes have suffered whenever pork prices have spiked. Back in March 2020, just as we were about to be plunged into lockdown, the company swung to a £21.8mn pre-tax loss for 2019 that was partly linked to the spread of African Swine Fever and its consequent impact on prices.
Where are prices now? Anyone filling up their grocery basket will know that costs aren’t working in favour of the consumer. In August, Cranswick (CWK), another sausage-related UK stock, warned that domestic shoppers would be on the hook for further price increases as pig prices had increased by more than a quarter between April and June of this year in comparison to the same period in 2021.
It's conceivable, however, that the pork price run-up may be about to click into reverse because China has decided to flood the global market through the release of its pork reserves. Beijing has tried this a few times in 2022 without being able to put a cap on growth just yet. Yet the staggering rate seen over the past 12 months, coupled with China's continued supply commitments, may mean prices will finally peak some time soon. In this context Saria’s move appears to be well timed, even though animal feed costs remain near record levels after disappointing grain harvests in the US, parts of Europe, and Asia.
The pork price surge and its impact on consumer demand might have rendered Devro a particularly tasty morsel, but is it the latest sign that sterling weakness will spike further interest in UK companies from abroad? Saria didn't get much of a bargain on this front – the pound is more or less flat against the euro this year – but the deal will bring to mind the prospect of other overseas takeovers.
Devro didn’t make the cut in a recent informal survey conducted by Bloomberg to highlight potential takeover targets from across the global market. That survey, which was carried out among risk arbitrage desks, fund managers, and business analysts, concluded that UK companies represent seven of the top 10 most likely candidates across the board. BT Group (BT.) holds pole position, perhaps not that surprising given its debt overhang and capital expenditure demands in a rising interest rate environment. Vodafone (VOD), which is now trading at pre-millennial levels, also apparently has a target on its back.
Beyond any strategic considerations linked to either sausages, pork, or telecoms, the reality is that UK stocks are cheaper now – on a relative basis – than at any time this century, arguably with good reason, but cheap, nonetheless. Cumulative outflows from UK equity funds are at their highest point in a decade, a trend exacerbated by the Autumn Statement, while UK-mandated investment funds are trading at yawning discounts to their US and eurozone equivalents.
UK stocks are already priced for a deep, lengthy recession, but short of a foray into merger arbitrage, it makes sense to cast around for businesses – at least those with balance sheets unencumbered with excess borrowings – which have declined in value simply because of related index contractions or even those which have effectively decoupled altogether.
Then there are those companies such as defence contractor Chemring (CHG), whose valuation has improved through 2022, but which still compares unfavourably to top-tier industry peers simply because it's a constituent of the underperforming, domestically focused FTSE 250 index. Chemring falls under the 'growth' banner rather than 'quality', but its potential long-term valuation uplift is supported by projected global demand for its advanced countermeasures and energetics business and the barriers to entry they provide.
