There are signs this week that jittery public companies may be willing to accept lower takeover offers, after the first quarter of negative growth in the UK since early 2021.
High inflation, a mounting energy crisis and recession fears have rocked public markets, with many listed companies seeing their market value deteriorate.
Ted Baker PLC (LSE:TED) appears to have been waiting for the best part of the year for markets to recover, rejecting takeover bids from private-equity firm Sycamore Partners earlier this year, only to accept a lower trade offer last night.
Reebok owner Authentic Brands’ £211mln cash bid for the clothing retailer, priced at 110p per share, is just a tiny fraction of its market value in early 2018.
A year before the pandemic, Ted Baker’s shares traded for twenty-five times as much as the offer price, at about 2,553p per share.
This could be an indication that companies might be willing to sacrifice some market value for the lure of less turbulence.
It’s been a tough year for Ted Baker, during which its share price has fallen by a quarter, which might on the surface suggest it is an isolated case.
AJ Bell financial analyst Danni Hewson said: “It’s been a torrid time for fashion retailer Ted Baker but beneath all the scandals and sorry trading performance there is clearly some value remaining in the brand.
“US Authentic Brands Group, which previously purchased Reebok among other names, clearly thinks the brand has something to offer as it has decided to swoop for the business in a cut-price deal.”
But recent data suggests the total value of merger and acquisition deals in the UK is falling.
According to the Office for National Statistics, the total value of domestic UK mergers was £4bn in the first quarter of this year, £1.1bn less than the equivalent period a year earlier when more than £5bn were completed.
Privatisations could also be coming off the roil as fund managers are less willing to pay high prices for assets.
“Indications are that private multiples are heading lower, taking their cue from the recent slide in public valuations,” data firm Bain & Co said in a research report.
Other analysts say the UK take-private market has been “subdued in 2022”.
UK-listed assets taken private in 2021 totalled 15 worth around $25 billion in total, according to PitchBook.
That fell to US$1.4bn this year through to May when just three deals were announced.
“Across Europe, a recent public market sell-off could yet spur take-private activity as pricing becomes more attractive,” Andrew Woodman, London chief at Pitchbook Data, said in May.
“But that will likely be tempered by the fact that a broader European recession could mean overall [private-equity] deal activity falls from its previous record levels.”
Unlike the US bear market, the FTSE has stayed relatively resilient in the face of the growing energy crisis in Europe and talks of a recession.
Yet following news of negative growth in the second quarter, which though milder than expected at -0.1% could still portend a recession, that may change.
According to Bain & Co’s mid-year private-equity report published last month, “uncertainty around inflation and asset valuations has slowed deal pipelines.”
This is because across many sectors, technology especially, “debt is becoming more expensive”.
Bain’s analysts said banks, now facing losses on loans, are “asking a lot more questions about a company’s exposure to inflation and rising rates, making it harder to close transactions”.
Inflation is expected to have the most impact on the US and tech market, but the disruption caused by Russia’s war on Ukraine to energy markets means Europe will also be affected.
It also emerged this week that Darktrace PLC (LSE:DARK) and FTSE 100-listed RS Group are similarly exploring takeover offers.
Thoma Bravo, a tech investor, has made an approach for Darktrace, little more than a year after its debut on the London Stock Exchange last April.
Darktrace’s shares are trading at double the level they were at its debut, at 499.04p by midmorning following a flurry of interest around the takeover rumours, up from 250p per share at flotation.
Going private may have particular appeal for the company as its co-founder Mike Lynch continues to fight extradition to the US on fraud charges, according to Hewson.
“After a tumultuous year-and-a-bit on the stock market it looks like AI-driven cyber security firm Darktrace might be set for an exit into private equity ownership,” Hewson said.
“The wild swings in the share price, while linked to instability in the tech space and wider markets, do suggest that UK investors have struggled to get to grips with this complex tech story.”
Bucking the trend was a reportedly generous offer for RS Group this week, showing there is still an appetite for the value in blue-chip companies.
The industrial and electronics part provider is being courted by an undisclosed buyer for a 1,500p a share bid, which exceeds its share price high of 1,235p per share in November.
While the number of stock exchange debuts is dwindling, private fund managers are “heading instead to deliver value through take-privates" and looking for inflation winners, Bain said in its report.
It said investment returns made during recovery years, post downturns, have “consistently outperformed” long-term averages.