Another day, another bid for a UK company from a private equity firm.
Today it is Biffa PLC (LSE:BIFF)’s turn to attract the eye of a predator but what is making UK companies so attractive to corporate raiders?
READ Biffa receives takeover bid from US private-equity firm
Cheap as chips
Relatively speaking, UK companies are cheap as chips.
The FTSE 250 index, which is choc-a with well-known companies that are small enough for many private equity companies to devour, trades on a price/earnings ratio (PER) of about 15.2, which is to say that if profits remain steady it would take the acquirer 15.2 years to earn back the purchase price.
The FTSE 100, meanwhile, has a PER of about 14.9. To put that into perspective, the P/E ratio reached an all-time high of 34.210 in September 2016 (and a record low of 7.410 in March 2009).
Across the pond, the S&P PER is 20.8, so about 40% dearer than the FTSE 100.
Cheaper still in dollars
This year, sterling has fallen against the dollar to US$1.2519 from US$1.3522 at the beginning of the year. A year ago, a pound would have bought you US$1.4110 dollars.
So, allied to the all-around cheapness of the UK equity market, the strength of the US dollar (or weakness of sterling, if you prefer), makes UK PLC even cheaper.
Old-fashioned companies
With tech companies losing their allure, there has been an increase in demand for “value”, i.e. companies that have been around the block a few times and are making money.
The UK is crammed full of these sorts of companies and noticeably short of “jam tomorrow” “paradigm-shifting” “market disrupting” companies (it’s not short of corporate buzz phrases, however).
Cash is burning a hole in private equity firm’s pockets
Private-equity funds are awash with cash, with levels of unspent money in the asset class hitting new record highs of about US$1,800bn this year, according to the latest estimates from research company Preqin.
With interest rates on the rise, if any private equity company wants to supplement cash resources by taking on debt to purchase a particularly hefty acquisition they had better get a move on, which might explain why we have seen tilts in recent months at companies such as Pearson PLC (LSE:PSON), Ted Baker PLC (LSE:TED), ContourGlobal, First Group PLC, Amey, Ideagen, Stagecoach Group PLC (LSE:SGC), Caretech, LV and Countryside Partnerships PLC (LSE:CSP).
Not all of those tilts have been successful, with institutional investors showing a bit of backbone that was not evident when, for example, fantastic companies such as Cadbury Schweppes and ARM Holdings were sold for a song in days of yore.
The government is also showing signs of developing a spine. In the past, successive governments of all political hues have not so much operated an open house policy when it comes to foreign bidders but seem to have actively encouraged them in.
A recent shot across the bows of Altice UK Sarl, which has built an 18% stake in BT Group PLC (LSE:BT.A), by the UK business secretary Kwasi Kwarteng, suggests even the government has had enough of the “everyting must go” sale.
Kwarteng has considered Altice UK’s move to increase its shareholding and is “exercising his call-in power under section 1 of the National Security and Investment Act 2021”.
So, while private equity buyers accounted for 64% of the takeover bidders in 2021 and have been similarly active in 2022, the happy days for private equity may not last much longer.