US firms set to pounce on City’s low valuations as London M&A rebounds
US corporates and private equity firms are readying a deals offensive on the London Stock Exchange in 2024 as dealmaking in the City rebounds from a slump last year, according to a London investment bank.
In its annual mergers and acquisitions (M&A) report today, bankers at Peel Hunt said they were expecting to see a “recovery” of inbound bid interest from North American corporates on smaller UK firms, as well as increased merger activity among UK listed firms “to create businesses of greater scale and relevance”.
“While the operating environment for many companies remains tough, boardroom confidence in the outlook and therefore front-footed, strategic M&A as a scarce source of growth is strengthening,” said Michael Nicholson, head of M&A at Peel Hunt.
“For financial sponsors, greater certainty over future interest rates lends itself to more robust returns modelling and more confident investment decisions.”
Listed companies’ valuations have struggled with 30 months of outflows from equity funds as investors seek better returns in bonds and international markets, partly causing the FTSE 100 to lag behind international peers.
Despite a slower start to last year than many expected, a total of 40 firms were eventually taken private after a flurry of activity in the closing months of the year, with over half of the buyers coming from outside the UK.
A number of blockbuster overseas bids also fell apart on the chasm between seller and buyer price expectations. THG, the now-owner of City A.M., and energy services firm Wood Group repeatedly rejected a series of bumper bids from US buyout group Apollo on price grounds, saying they undervalued the firms.
In its report today, Peel Hunt said it expected most M&A in 2024 to stay focused on small and mid cap firms, with “structural challenges” sustaining a valuation gap with overseas peers and giving management teams more appetite to consider alternative ownership options.
However, Peel Hunt said it is also expecting large cap takeovers, which were scarce in 2023, to pick up this year as major global financial sponsors and strategic acquirers become more active.
The broker also expected greater levels of shareholder dissent around UK takeovers as “share prices are perceived to be dislocated from fundamental value” and investors look to price in an improved outlook.