Two takeovers in two days suggest UK stocks still offer value

“Two private equity approaches in two days – one for John Laing from KKR and one for St Modwen from Blackstone – add to a growing list of takeover offers for UK-listed companies, to suggest there is still value to be had, even as the FTSE 100 tries to pull away from the 7,000 mark,” says AJ Bell Investment Director Russ Mould. “Granted, KKR is yet to table a formal bid for John Laing, but St Modwen’s board seems minded to recommend the 542p-a-share cash offer and the 21% premium that represents, should a firm offer be made.

“That 21% premium is below the 36% average premium offered by bidders, across successful, ongoing and even failed approaches, over the past six months, when some 40 predators have stalked their prey. The number of bids, and the premium, suggests that someone, somewhere – be they trade or financial buyers – feel UK companies are still going cheap, with overseas buyers potentially attracted by how the pound still stands below the levels reached just ahead of the Brexit vote five years ago.
 

          Source: RNS, Company accounts

“Investors could therefore be forgiven for asking which companies could be next in the firing line. 

“Buying a stock purely in hope of a bid is not a good idea, as approaches can take a long time to appear, as shareholders in RSA for one will attest, if they ever appear at all. Investors must therefore look to buy shares in a company on that firm’s individual merits – the strength of its competitive position, finances and management as well as the stock’s valuation. 

“If you think something is overvalued, why would someone pay a premium to take it over? The bidder will want a financial return too, and they will be looking at cash flow to see how quickly they can pay back the purchase price. Bidders may also look for asset backing as a means of measuring valuation, while they will also pay very close attention to the balance sheet, because they will take on not just the assets of a firm, but its liabilities as well. Their own balance sheets will take on debt, leases, any pension deficit and contingent liabilities such as deferred payment for acquisitions and even potential legal bills.

“Just looking at a company’s market capitalisation and comparing that to sales, profits and cash flow is not enough research. Investors will need to look at enterprise value (EV) multiples, which add liabilities to the market cap and take off any cash, or investments or pension surplus. That gives a more rounded picture of what a bidder will be taking on and give a better guide to whether a firm may be a potential takeover target or not.

“Using John Laing and St Modwen as examples, you can see why they have attracted attention.

“John Laing’s shares had fallen by a fifth in 12 months, even as the FTSE All-Share surged. The firm has a net cash position, a portfolio of infrastructure assets which have the scope to offer predictable, long-term cash flows and the company’s net asset value per share (NAV) figure at the end of 2020 was 310p. The shares were trading at a tiny discount to that before news of the putative KKR approach broke.

“St Modwen’s focus on logistics sites and housebuilding, with a strong pipeline of developments, also means its business profile fits the bill for private equity. In addition, the company’s NAV per share figure at the last count was 428p and the shares have consistently traded at a discount to that figure over the past year.”