Beware perils of the UK takeover boom: Merger mania can hit investors

At first sight, BT, ContourGlobal, Countryside Properties, FirstGroup, Homeserve, Shaftesbury and Ted Baker seem to have little in common. But they are just some of the companies that are the subject of a bid, or are rumoured to be a target.

This upsurge in takeovers and speculation in the UK may have been overshadowed by Elon Musk’s siege of twitter on the other side of the Atlantic. 

But it is a sign that shares in UK companies are seen as undervalued, despite the economy’s plight. It is also a vote of confidence in the nation’s entrepreneurial spirit. But is this flurry of bids unalloyed good news? 

Concerns that UK plc is being bought on the cheap have, at last, provoked the Government to act in certain cases. 

Investors may be excited, but they should lower their expectations about the size of potential payouts – and accept they could be missing out on future gains. 

US private equity groups are the most powerful players in this game, having snapped up £326billion worth of listed UK companies in the past decade. They have $1.8trillion (£1.4trillion) to spend, but want bargains, as was exposed by the Mail’s campaign about their predatory strategies. 

Let’s recognise, however, that, in the short term, the arrival of any bidder can revive a flagging share price. For example, San Francisco-based inclusive Capital is offering £1.47billion for housebuilder Countryside Properties. At 295p a share, this represents a premium to the current price. 

Shares in ContourGlobal, the emerging markets power generator, leapt by a third on the announcement of the £1.75billion bid (263p a share) from KKR, the Us private equity giant. 

Authentic Brands, the US consumer goods group, is keen to acquire Ted Baker for £300million, or 150p a share.

The Canadian Brookfield fund is offering £4.1billion – £12 a share – for Homeserve, the boilers and pipes company. Note, however, that some analysts reckon that the long-term value is £15.50. 

The takeover of one company could mean others in the sector also succumb.

Shaftesbury is merging with Capco to create a £3.5billion West End of London property empire. This may mean more bids for REITs (real estate investment trusts), trading at a discount to the net value of their assets, with Blackstone, another US private equity titan, on the prowl. 

Domestic transport is another popular sector. I Squared (yes, another US private equity group) is bidding £1.2billion (118p a share) for FirstGroup, which operates Avanti West Coast. 

Go-Ahead – which operates most London bus routes – could be next, or so it is rumoured. 

But those talking about any target in any sector are overlooking factors such as the focus on enterprises crucial to national security.

Business Secretary Kwasi Kwarteng is using the new national security takeover law to investigate stakebuilding in BT by Altice, the vehicle of Patrick Drahi, Sotheby’s French boss. 

BT’s Openreach division, which builds the bulk of Britain’s broadband and phone connections, is the object of Drahi’s desires. But it is crucial to levelling up. BT’s 700,000-plus small shareholders should not raise their hopes of a juicy takeover too much. 

The economic outlook could also slow the takeover boom. Tineke Frikkee, head of UK equity research at Waverton investment Management, says: ‘When interest rates and inflation are low and GDP growth is robust, it’s easy to model the value of future cash flows. At present this is tricky. Where will inflation go? Will companies be able to pass price rises? When will logistics challenges be resolved? What discount rate should you use to assess a company’s future value?

‘But, once some of these variables become clearer, we could see the pace of takeovers pick up.’ 

If you are wondering whether the managers of the funds you hold will sell out too readily, some reassurance comes from Tom Stevenson, an investment director at Fidelity International. 

‘Managers invest in high-quality companies and if a third party decides to pay a significant premium for control, that’s icing on the cake. In most cases, the extra money will simply bring forward returns that they hope could be achieved over time. 

‘But in other cases they will resist a takeover because they see it as an opportunistic bid to take advantage of a temporary downturn in the share price.’ 

Fund managers don’t normally pick stocks ripe for a takeover. However, if you are looking for a fund that contains alluring UK companies, Ben Yearsley of Shore Financial Planning suggests JO Hambro UK Dynamic, which is ‘a fund full of recovery-type stocks’. 

These tend to attract bids which produce quick returns for shareholders, which is gratifying. But let’s acknowledge that the takeover boom is also, on a deeper level, troubling for the future of UK plc.