- 51% average bid premium in 2023 for UK stocks
- Interest rate cuts could prompt private equity firms to make bigger acquisitions in 2024
- Takeover targets that could attract interest in 2024
“The UK stock market continues to be a hotspot for takeover activity as buyers look for companies trading below their true value, or ones that could strengthen their capabilities, with the average bid premium rising to 51% in 2023 versus 37% in 2022,” says Dan Coatsworth, AJ Bell stock market analyst.
“That could be good news if you hold a potential takeover target in your portfolio, where a takeover at a sizeable premium may help you realise a gain on your original investment, depending on the price you bought at. However, the alternative view is that some companies listed in the UK still aren’t enjoying the kind of valuations they may aspire to, in turn making them attractive to those seeking a bargain. Given that a major re-rating in UK equities appears to be nowhere in sight, expect to see more takeover activity in 2024 as there are still companies going cheap.
“Takeover targets come in many shapes and sizes, but often come onto the radar of acquisitive firms when the share price tempts suitors with the prospect of a bargain.
“Reckitt and Unilever could be ones to watch as potential takeover targets if there is appetite among industry or private equity to do large-cap deals. Both are companies seen to have lost their way to some extent but are now trying to get back on track. Their size does mean any bidder needs considerable firepower.
“Share price weakness and an undemanding valuation at WPP sees the company trading on 7.8 times forward earnings and an EV to EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) ratio of 8.9. Although concerns about the global economy in 2024 are a worry, it could present an opportunity for someone to bid if the company experiences a difficult year.
“Analysts have also touted Anglo American as a potential takeover target for someone like Glencore after losing 39% of its market value in 2023 thanks to operational setbacks, weaker commodity prices and downgraded guidance for production. While there is merit to this line of thinking, the mining sector has a history of buying at the top and not at the bottom. Miners show a tendency to only want to do deals when everything is going well, rather than risk spending money when key commodity prices are flat or falling, such as we are seeing now.”
The following three stocks look like more plausible takeover targets:
- Entain
The gambling group ticks all the right boxes for being a takeover candidate. Entain has significant scale in the industry but setbacks have hurt the share price and it now has a caretaker chief executive.
The company is one of the world’s largest sports betting and gaming groups and scale matters in this industry. It owns big brands including Ladbrokes, Coral, Eurobet and STS.
Entain now trades around 980p, having suffered a disastrous few years. An aggressive acquisition spree attracted widespread criticism and more recently it agreed a deal with the Crown Prosecution Service to pay £585 million in relation to a bribery investigation linked to its former Turkish business. Chief executive Jette Nygaard-Andersen quit in December 2023 and non-executive director Stella David has replaced her on an interim basis.
The logical buyer is MGM, its partner in the US, which previously offered the equivalent of £13.83 a share to buy Entain in January 2021. That same year DraftKings also tried to buy the business, proposing to pay as much as £28 a share.
The company’s shareholder register includes three activists who might push for a sale or break-up of the business. They would no doubt seek the highest possible price, so if we do see a new takeover approach do not expect the first bid to be the winning one.
- Premier Foods
Mr Kipling maker Premier Foods was the subject of two takeover bids (at 52p and 60p) from US spice maker McCormick in 2016, which it rejected on valuation grounds. Since then, the business has transformed itself and it now looks ripe for takeover interest once again.
Japanese food group Nissin already owns 24.27% of the business, having formed a strategic partnership at the same time as the McCormick bids were rejected. Premier Foods distributes Nissin’s Soba and Cup Noodles products in the UK and its Batchelors Super Noodles use Nissin’s noodle manufacturing expertise.
In recent years, Premier Foods has gone from being a zombie company drowning in debt repayments to one that is reinvesting surplus cash into product innovation and marketing. This has significantly de-risked the investment case and made the company more appealing.
Premier Foods’ shares are not expensive at 9.9 times forecast earnings and 7.2 times EV to EBITDA. Nissin might seem the logical buyer given its existing stake, although a more diverse food company might also be interested given Premier Foods is also in cakes and meal kits.
- Revolution Beauty
Revolution Beauty has struggled since joining the stock market in 2021 and that created an opportunity for Boohoo. The latter bought a strategic stake in 2022, building on an existing relationship whereby Boohoo sells Revolution Beauty products through various channels. Now holding 27.13% of the shares, Boohoo could feasibly acquire the remainder of the business in 2024.
A disagreement over Revolution Beauty’s leadership is now in the past after Boohoo won a battle to replace certain senior directors, and Boohoo wants to be bigger player in the beauty market so there is logic to owning the skincare group.
Revolution Beauty is worth approximately £100 million and had £24 million net debt as of 31 August 2023. Assuming a 30% bid premium for the remainder of the company it does not already own, Boohoo would need to pay circa £95 million for the outstanding shares and assume the debt on top. It had £290 million of liquidity headroom from existing debt facilities as of 31 August so such a deal looks manageable.