Morgan Stanley says that the City deal drought is about to end as central banks begin to lower interest rates. This will encourage investors to release pent-up funds.
Wall Street Bank calculated that private investors and corporate buyers have accumulated cash piles totaling $5.6 trillion, and $2.5 trillion, respectively. These funds can be used to invest in deals as the mergers-and-acquisitions market continues its thaw.
Analysts at the US lender have identified a number UK listed companies as potential targets, including Aston Martin ITV, Trainline WH Smith, and Watches Of Switzerland. The analysis is based upon financial models that are used to determine the likelihood that a stock will attract an offer.
Morgan Stanley’s team discovered that attractive targets are generally smaller companies with a low price compared to their book value. They said equity analysts in Europe were more optimistic than other regions.
The note stated: “Two decades of extremely weak M&A should increase activity levels as CEO confidence grows.
The last two years gave opportunistic CEOs and boards time to develop an inorganic strategy, evaluate opportunities and start preliminary discussions. This long period of preparation should result in a rapid acceleration of deal announcements and closings when the market turns.
All US banks reported a revival of deal activity in their earnings reports for the last three months 2023. Citigroup management stated that they have a “very solid” pipeline of deal opportunities to bring to the market, and will be able “move forward” these opportunities when economic conditions allow. Lazard reported that global M&A had “turned the corner”, and both Evercore & Jefferies stated their deal backlogs were “continuing to strengthen”.
David Solomon, Goldman Sachs, the CEO of the bank, spoke to analysts during its fourth-quarter earnings conference call in January. He also praised a “potential revival” in deals. Denis Coleman added that Goldman Sachs’ backlog increased quarter-on-quarter due to a significant rise in advisory. The robust dialogue with our corporate clients is encouraging. “Even though it’s only been two weeks since the start of the year, capital markets have seen a solid level of activity in the US and Europe.”
Private equity investors, as well as their rivals, have found that London’s smaller and mid-sized companies are more attractive than the blue-chips in an age of high financing costs (Emma Powell).
In the last year, 40 deals worth more than £100m were completed. Half of these were on the junior Aim Market, 13 on the FTSE SmallCap Index, and 3 on the FTSE250. London’s midcap index has proved to be a good hunting ground for bidders this year.
In the property sector, there have been tie-ups among FTSE 250 members LondonMetric Property (the warehouse landlord) and LXI Reit as well as Tritax Big Box Reit & UK Commercial Property Reit. In the wake of the rapid rise in interest rate, the share prices of these four companies have lagged behind the value of the underlying portfolios of the businesses.
Curry’s, a struggling electricals retailer and Direct Line, a company that is trying to restore investor trust, both have rejected bids from overseas bidders. These bids came with premiums exceeding 30%. Peel Hunt’s analysis shows that bidders paid on average a premium of 50% for companies acquired last year.
JO Hambro Capital Management UK Equity income fund, which is a major shareholder in Curry’s said yesterday that an offer between 80p to 100p per share would be acceptable compared to the current bid from Elliott Advisors. The US investor.
Analysts claim that investors are undervaluing UK companies, especially in comparison with their international counterparts. The FTSE 250 is trading at almost 11 times earnings in the future, which is the lowest price since 2009 after the global financial crisis. The American S&P Mid Cap 400 is priced at almost 16 times forward earnings.
The markets believe interest rates are already at their peak and have priced a reduction for later this year. This could increase confidence among companies that are dependent on the UK’s economy.