Sometimes it’s just good to be wanted.
After Liz Truss’s “mini” Budget last year unleashed market chaos and a co-ordinated sell-off in UK assets, the country for a period was routinely being described as “uninvestable”.
Overseas investors, multinational businesses choosing where to put money and City grandees were all voicing the opinion that the UK’s political and policy ructions had rendered it untouchable. One chief executive at a perennial takeover target confessed to sleeping pretty soundly at night, safe in the knowledge that potential buyers, who were mostly in the US, considered the UK to be basically beyond the pale.
Has the mood changed? Tiggerish advisers’ chat about ideas being dusted off and work resuming is best treated sceptically. But this week, two takeover approaches for UK-listed companies became public, both by US private equity funds. First, events business Hyve said it had received an approach from Providence Equity, valuing the company’s equity at around £300mn. Then Wood Group, the energy services company, disclosed it had received no fewer than three bids from Apollo, the latest of which valued the company at about £2bn including debt. Perhaps the stench of rotting lettuce has lifted?
The global deals market had, in fairness, largely ground to a halt before the scent of a prime ministership gone wrong permeated the UK. Global private equity volumes more than halved in the second half of last year compared to the first, according to Refinitiv, as banks slammed the door on financing and investment committees struggled to gauge a likely path for interest rates, inflation or growth. Private equity-backed UK take-private deals slowed virtually to nothing. Year to date dealmaking is down 70 per cent.
Private equity often leads a dealmaking upturn, with the sector eager to find bargains before cyclical market discounts disappear and motivated by the need to deploy the billions raised in the hot market for fundraising in recent years. UK economic data has come in better than expected, raising hopes of a milder downturn. The scriptwriters of the Downing Street soap opera appear to have taken a sedative.
Meanwhile, the conditions that drew buyout groups to the UK market in recent years are still there: the stock market remains cheap (albeit not as much as it once was) and the pound, while well off its September lows, is weak against the dollar. The banks and energy companies that were a drag in the times of free money have bolstered London’s indices as interest rates have risen. On a blended valuation basis and adjusted for sectors, the UK discount to global equities has narrowed from about 25 per cent at its peak to 15 per cent, notes Simon French at Panmure Gordon. There is still a sentiment overhang on UK equities that persists, regardless of sector, says French.
It’s worth noting that in Hyve and Wood, private equity’s dealmakers have alighted on pretty international businesses that happen to be UK listed: only about a quarter of Hyve’s revenues last year were in the UK; Wood makes most of its money overseas. Neither has agreed a deal: Wood has rejected three bids; Hyve’s board is considering an approach that analysts at Investec called “opportunistic”.
Even if deal activity is back from the dead, a full revival seems distant. Private equity groups have plenty to handle with existing investments where valuations have fallen. Banks are still clearing the backlog of last cycle’s hung leveraged loan deals; appetite for new lending is subdued, limiting deal size. But the market is improving. And private credit has been increasingly filling some of that gap, though at a higher cost and with more covenants than public markets required in recent years.
It’s hard to feel terribly confident about the strength of either a deal recovery or a UK comeback at this stage. But hey, we might be back to being a relatively cheap and slightly troubled stock market being picked over by private equity groups looking for a bargain. And honestly, that feels like progress.