UK M&A bargain-hunters help fix London discount
19/06/2025 10:03
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. By Yawen Chen LONDON, June 19 (Reuters Breakingviews) - Once hard-nosed UK boards are finding buyout bids harder to resist. Two recent approaches, for precision-instruments maker Spectris SXS.L and semiconductor company Alphawave AWE.L, came with 85% and 96% respective premiums. If that keeps happening, London’s infamous valuation discount may eventually close. The number of UK take-private deals has risen to 35 this year, Dealogic data shows, which is the highest count since 2011, even if the 31-billion-pound total value isn’t a recent record. Medium-sized companies look like the most plausible prey: the FTSE 250 Index .FTMC is 12% below its September 2021 peak and currently trades at just 12 times forward earnings according to LSEG data, compared with high-teens multiples four years ago. The returns on offer from UK take-privates can be juicy. Take Advent International’s tilt at Spectris that values the enterprise at 4.2 billion pounds using the company’s definition of debt, equivalent to 14 times 2025 expected EBITDA. Imagine the new owner uses a leverage multiple of 6, implying a 2.4-billion-pound equity cheque. If Advent can get Spectris’s EBITDA growing at 10% annually – slightly below the level analysts expect on average between this year and the year after next – it would reach 482 million pounds after five years. Using a constant valuation multiple, the business would be worth 6.8 billion pounds and Advent’s equity would double to 5.8 billion pounds, for a near-20% internal rate of return by 2030. That’s according to Breakingviews calculations using a 25% tax rate, 8% interest cost, steady capital expenditures and assuming that all free cash flow goes towards paying down debt. In most cases, the boards of UK mid-sized companies have plans of their own to revive their sagging share prices. But it’s extremely hard to say no to buyout barons or corporate acquirers offering a near-100% premium. Cash offers come with near-term certainty, whereas external events could upset even the most credible self-help plan. That’s especially the case in London, where investors seem less inclined to put their money with each year that goes by. UK-focused equity funds suffered 9.6 billion pounds of outflows in 2024, marking the ninth year of withdrawals and the worst year on record relative to the wider market, according to Calastone figures. That means CEOs and boards trying to improve their valuation multiples are swimming against the current. The Labour government and regulators are trying to fix the perceived UK stock discount, for example by relaxing listing rules and steering more British money towards local equities. Takeovers could also help, though at the cost of hollowing out the market. The more common high-premium takeovers become, the more likely it is that investors will start pricing in their likelihood beforehand. Over a fifth of the FTSE 250's constituents are trading at least 40% lower than their September 2021 levels, a Breakingviews analysis found. In other words, buyout barons who think British valuations are out of whack with reality can help to close the gap. They’ll just have to hope that the UK discount hasn’t widened again when it's time to sell. Follow Yawen Chen on Bluesky and LinkedIn. CONTEXT NEWS Britain's Spectris, which provides hardware and software solutions to sectors such as pharmaceuticals, said on June 9 that it would accept Advent International's bid of 37.63 pounds per share if the private equity group made a formal offer. Buyout barons pounce on UK firms' depressed shares https://www.reuters.com/graphics/BRV-BRV/gdpzbrnbepw/chart.png (Editing by Liam Proud; Production by Streisand Neto) ((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))