The UK stock market has emerged as a fertile hunting ground for takeovers in recent years. This has largely been driven by the steep discounts available on UK equity markets when compared to the rest of the world. After all, why wouldn’t you buy a £1 coin for 50p when presented with the chance?
This hasn’t happened by chance. A series of events, starting with Brexit uncertainty and progressing through political instability and a poor macroeconomic backdrop, have led to a structural undervaluation of the UK stocks. And while other global markets rebounded post-pandemic, the UK has failed to mirror such a performance.
One of the primary drivers of the market’s perennial discount is the fact that UK pension funds have significantly reduced their exposure to UK equities, instead choosing to reallocate their assets to bonds and global equity markets. Astonishingly, the percentage of UK equities in pension portfolios plummeted from over 50% in 1997 to just 6% in 2021.
To add salt to the wound, retail investor sentiment has been inconsistent, at best. There were substantial inflows in 2013-2015 and 2020-2021, followed by record outflows in recent years as UK investors have clamoured to access the mega returns on offer in international markets.
Consistent record highs being set in the US, Germany and Japan, to name a few, and the improving access to these markets has made it a far easier decision for UK investors to put their money elsewhere. Indeed, the MSCI UK index, which tracks the performance of most of the UK’s largest businesses, has seen less than half of the returns of the MSCI World index since 2009.
Source: MSCI
The result is a market that trades at a perennial discount to its international peers. If we add in the relative weakness of the pound against the dollar in recent years, UK assets become even more appealing to foreign acquirers.
Takeover central
Private equity (PE) firms and industry players alike have taken note of the discounts on offer when shopping on the UK equity markets. The allure of buying high-quality assets at a discount has proven too good to resist.
This has all led to a recurring theme of takeover premiums, with acquirers typically offering 30-70% above the prevailing share price on the day of the offer.
