Cheap UK Shares to Buy Before Bidders Snap Them Up

Britain’s takeover boom roared back into focus this week, as bids worth £3billion were announced on Tuesday alone.

The hunger among overseas buyers for FTSE 100 and FTSE 250 companies shows little sign of fading. Over the past 12 months, foreign predators have snapped up UK-listed businesses worth $110billion (£81billion).

One analyst likened the rush by private equity firms and other bidders to diners descending on an “all-you-can-eat buffet”, with long-neglected British companies suddenly looking like some of the most tempting items on the menu.

For investors who have been looking elsewhere, it may be time to take another look at what the UK stock market has to offer — a point this column has been making throughout the summer.

Holding on to UK shares and funds can be seen not only as a vote of confidence in Britain, but potentially as a profitable one too.

George Godber, co-manager of the Polar Capital UK Value fund, says: “In our view, the UK market offers extraordinary value as the cheapest developed market in the world.”

But the wave of mergers and acquisitions is also steadily shrinking Britain’s stock markets, with wider implications for the public finances. As Godber notes: “The UK markets represent a critical 13 per cent of the total tax take.

“Although new Chancellor John Healey will have a very busy in-tray, it might be wise to pay some attention on what needs to be done to protect this.”

But while there will be more such calls ahead of next month’s Budget, ministers appear to be ‘in denial’ over this and other economic challenges, or so argues Lord O’Neill, a former Goldman Sachs economist and an ally of Prime Minister Andy Burnham.

This suggests the selling of what brokers Peel Hunt call ‘the family silver’ will continue.

So here’s how to understand the lure of UK plc for bargain-loving US billionaire hedge fund managers – and how to make the most of the bonanza.

The latest targets

The biggest name in this week’s £3billion bid bonanza is Bodycote, the Macclesfield-based thermal processing service company.

Vying to be its new owner is Veritas, a US private equity player, which is offering £1.64billion. 

This is equivalent to 940p-a-share since a dividend is included. But the jump in Bodycote’s shares to 949p indicates a battle may loom, with rival private equity group CVC telling Bodycote shareholders to ‘take no action’. In light of this, the firm could be worth an early autumn flutter.

Also being snapped up is Gamma Communications, which will be bought for £1.08billion by British private equity firm Epiris. The 1,419p-a-share bid is 53 per cent above Gamma’s price when Epiris came on the scene in April.

Yet this may not be the end of the story. Meanwhile, Capricorn Energy is to become part of Norway’s oldest oil firm DNO, which is paying £293million – 384p-a-share.

This is 45 per cent above Capricorn’s price in the spring when the company became the subject of takeover interest.

The list of the other businesses that have been swallowed this year include insurance broker Beazley, DCC Energy and easyJet, for which Apollo, another US private equity powerhouse, is paying £5.7billion, or 715p-a-share.

This compares with the 399p at which the airline was trading before suitors emerged.

New bidding tactics

The Government’s apparent disregard for the damage being done to stock markets is only one of the reasons why bids succeed.

Fund managers who believe in bright futures for the assets they hold tell me they try to persuade executives to reject an inadequate offer for their company.

But these top managers say executives like the sound of better salaries. They are also drawn to US-style board meetings that focus on expansion rather than complying with regulation, as is often the case in Britain. 

Winning over directors is not the predators’ only way. Legal firm Herbert Smith Freehills Kramer says this has been the year of the ‘bear-hug’ bid, which appeals directly to shareholders in the face of board resistance.

Segro, the UK’s largest listed property company, last month succumbed to the San Francisco giant Prologis in a £14billion deal (1,031.7p a share). 

Prologis may be acquiring Segro’s data centre empire for what some regard as next-to-nothing. But the bid represented an uplift of 39 per cent on Segro’s share price in June so, it seems, its directors had to assent.

Next opportunities?

The economic backdrop may not be inspiring. Yet the FTSE 100 and FTSE 250 have both risen by about 8 per cent since the start of the year. 

This is partly the result of the popularity of old-school ‘Halo’ – heavy asset, low obsolescence – companies in defence, engineering, infrastructure and other industries whose fortunes will not be derailed by AI disruption.

The love affair with such operations has been heightened by the concerns surrounding the potential bubble in the shares of US tech titans expending vast sums on AI.

Ben Yearsley, of Fairview Investing, says: ‘The FTSE 100’s component – banks, energy companies, miners – looked deeply unexciting when tech stocks were all the rage. But, apparently, boring is now the new exciting.’

The allure of such companies is exemplified by last year’s £4.2billion takeover of scientific instruments group Spectris. KKR, the private equity titan, handed over 4,175p a share, a premium of 105 per cent.

The newly irresistible nature of some dull British businesses suggests that, as this column has maintained, it is worth sitting tight in FTSE 100 and FTSE 250 stocks and in UK funds and trusts. 

The view appears to be that almost anything could be up for grabs, which is both alarming and exhilarating.

However, in recent days, one sector has emerged as perhaps the next private equity hunting ground: Wealth management groups, the custodians of about £1.5 trillion of the nation’s savings.

Ken Wotton, manager of Gresham House Strategic Equity Capital, says the recent takeovers of Brewin Dolphin, Charles Stanley and Mattioli Woods illustrate the desirability of wealth managers. Earlier this year NatWest acquired Evelyn Partners, owner of Bestinvest.

He cites Brooks Macdonald as one such business to watch, since its turnaround under chief executive Andrea Montague is starting to show results.

The £2.5billion Quilter group could also be a bolt-on for a bank seeking to cater for better-off customers, according to Wotton.

Investing in a share solely on the basis of bid speculation is hazardous.

But the activity is giving UK shares a lift – which makes backing Britain potentially one of the most thrilling options for your autumn portfolio reshuffle.