Can buybacks spark a UK stock market rally?

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Wincanton, Hotel Chocolat, On The Market and SCS are very different businesses, but they have one thing in common.

Like the two dozen other British companies that have recently succumbed to takeovers, the logistics group, chocolatier, property portal and sofa chain were seen as alluring and cheap.

As revealed last week, Wincanton, whose customer base includes Waitrose, is to be taken private in a £556m deal, valued at 52 per cent above its pre-market share price. arrival of the buyer CEVA, the French global logistics group.

The typical bid premium used to be 30 to 40 percent. The powerful Mars Incorporated, owner of Hotel Chocolat, paid 168 percent above its stock price at the time of the offer. Note, however, that the offer of 375 pence per share for Hotel Chocolat, known for its Sleekster collection, was still lower than the share price peak of 540 pence at the end of 2021.

So who will be next, as the spotlight turns to the bargains potentially on offer in the unloved UK markets? You might be inclined to give little credence to talk about deals.

Brief watch: Board disaffection is a reason to pay attention to the rumors currently surfacing

Brief watch: Board disaffection is a reason to pay attention to the rumors currently surfacing

But boardroom disaffection is reason to pay attention to the rumors now surfacing.

Many executives would be unhappy with their company’s poor stock performance, making those bosses likely more willing to consider approaches.

Alexandra Jackson, manager of the Rathbone UK Opportunities fund, sets out the context. “The share prices of some mid-sized companies today appear significantly undervalued,” she says.

“Markets punish companies more harshly for any bad news, or even for the threat that can come from AI. We believe some of these stocks will attract bids, particularly when their models are subject to cyclical pressures rather than structurally broken.

“We are seeing that there is a wave of new board members among this set of companies. Of course, this is not surprising after a difficult period. But what’s interesting is how many of these newly appointed people have sold their old companies.

This change in board composition is another compelling reason to stay on top of takeover rumors. I may be a buy-and-hold investor – which is why I have stakes in funds like Rathbone UK Opportunities and mid-cap tracker Amundi which focus on mid-sized UK companies. But I also love bidding battles and the chance to get a rewarding outcome.

Brokers Peel Hunt say the takeovers of Wincanton and the two dozen other recent targets “provide a glimpse of the coiled spring that could be triggered to launch a new wave of higher-volume, higher-value activity in 2024, as the outlook for financing costs becomes more certain.” ‘.

If interest rates fall, US private equity predators could be on the prowl, fueling conflict over foreign buyers snapping up UK companies for next to nothing.

The private equity industry has record cash reserves of $2.59 trillion, according to S&P Global Market Intelligence. Its most powerful players are Blackstone, KKR and Apollo who late last year paid £506m for The Restaurant Group.

But Peel Hunt also expects more shareholder activism in 2024. Michael Nicholson, head of mergers and acquisitions at Peel Hunt, comments: “We expect the confluence of growing demand for UK assets and UK institutional investors looking to incorporating an improved outlook creates greater tension between buyers and sellers – and between target boards and their shareholders.

The focus will be on small and medium-sized businesses, but lower interest rates could make larger companies a more feasible proposition for private investors and business buyers.

Burberry, a member of the FTSE 100 valued at £4.46 billion, is said to be one of the candidates. Shares of the luxury brand have fallen 45 percent over the past six months.

At present, Burberry bags and coats seem to lack the sparkle that makes Hermès equivalents so desirable, despite being enormously more expensive.

Other names from the FTSE 100 are also mentioned: Centrica, owner of British Gas; the Drax generator; Entain, the owner of Ladbrokes; Reckitt, maker of Gaviscon and Nurofen and also Unilever, which brings us brands such as Dove and Marmite.

Shares in Entain have fallen 37 per cent over the past 12 months.

This sparked rumors that US gaming giant MGM – which made a bid for Entain in 2021 – could emerge as a suitor again. They have a joint venture in the Bet MGM online sports betting operation.

Such speculation will multiply, even around companies as colossal as BP, which is worth £96 billion.

This week, for example, the troubled financial group Abrdn was deemed vulnerable. Shares have fallen 25 percent over the past six months. The announcement of a cost-cutting plan seems to have aroused rather calmed concerns.

If you own shares in any of these companies, now seems like a good time to sit back, wait for developments, and hope that this speculation will help spark the rally in our stock markets this year.

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