The UK stockmarket is bargain central for private-equity funds

Private-equity giants are snapping up British companies. We should welcome them, says Matthew Lynn.

The Morrisons takeover promises plenty of high-stakes drama (see page 7). The buy-out firm, Clayton, Dubilier & Rice, (CD&R) has already tabled an offer worth almost £9bn once the company’s debt is included. Sir Terry Leahy, the man who ran Tesco during its glory years, is on board as an adviser, and may well make a return to the sector where he made his name. The offer was rejected, but on Monday morning the shares were up more than 30% on the prospect of a takeover battle for the chain. 

Welcome the foreign asset-strippers

It is far from alone. Asda has already been bought by the Issa Brothers along with TDR Capital. UDG Healthcare has received a £2.8bn offer, also from CDR. KKR is trying to buy John Laing for £2bn; Carlyle is looking to acquire the inhaler developer Vectura for close on £1bn. In the last month alone there have been nine offers for quoted British companies from the private-equity funds. The UK is turning into one of the most popular markets in the world for making acquisitions. 

It’s not hard to understand why. Battered by our departure from the EU, the British stockmarket is one of the cheapest. It trades at about half the level of the main American indices and at a lot less than France or Germany. It is the one place you can still find a bargain. It is also still relatively open at a time when the rest of Europe is turning protectionist. When Canadian firm Couche-Tard contemplated a bid for Carrefour, it was told the supermarket chain was a vital French strategic asset that couldn’t be sold to foreigners. Boris Johnson’s government is a lot more interventionist than any we have seen in the UK for a couple of generations, but it is unlikely to declare Morrisons a strategic national asset (I mean, it’s not Greggs we’re talking about here). If you can find the money, it’s probably yours, and that is not true of many other countries right now. On top of all that, and even with some delays to the end of lockdown, the UK is likely to make a strong recovery from the Covid-19 crisis over the next year.  

So there are lots of good reasons the private-equity firms are suddenly so keen on the UK. Expect to see a lot more bids in the months ahead. After all, if Morrisons is worth buying, then so are lots of other companies. If we are being honest, Morrisons is a fairly terrible company. It is the fourth-placed player in a brutally competitive market with a brand that doesn’t mean anything outside of its native Yorkshire. If it can attract a buyout offer, it is safe to say just about every other company in the FTSE 350 is a target. 

Two reasons to be cheerful

Plenty of people will oppose this. We will hear lots of complaints about foreign asset-strippers, about jobs lost, about how the UK is the only major country in the world that allows its companies to be traded like casino chips. There is some truth to that. Private-equity firms don’t have a great reputation for building businesses, especially in retailing, and they are often just out to make a quick buck, squeezing costs and suppliers before selling out. 

Yet there are two big upsides to this flurry of bids. Firstly, it will be a huge boost for the City at a time when Brexit means it is under threat. That threat was always wildly overstated. There has not been a wholesale move of banks and asset managers to Paris and Frankfurt as many predicted. Even so, life will be tougher without the same level of access to the main European markets, and it will take time to develop new ones in Africa, the Middle East and Asia. In the meantime, a mergers and acquisition boom will generate lots of advisory and trading fees, and that should be more than enough to keep the City humming through a tricky period of reinvention. 

Secondly, it is a vote of confidence. There is lots of capital sitting in the big buyout funds. It might as well be deployed in Britain as anywhere else – and the more money gets invested in this country, the more the rest of the world will notice. If the bid for Morrisons is just the start of a wave of takeovers, so much the better.

Recommended

The after effects of the gas-price shock
Economy

The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Ma…
17 Oct 2021
The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021
Whistleblower allegations – where now for Facebook?
Tech stocks

Whistleblower allegations – where now for Facebook?

The social-media giant has come in for some fierce criticism following revelations from a former employee. Just how much damage has been done?
16 Oct 2021
Inflation, energy crisis, strikes – have we gone back to the 1970s?
Investment strategy

Inflation, energy crisis, strikes – have we gone back to the 1970s?

Merryn and John talk about rising prices, productivity and the state of the labour market, plus are bond investors really the adults in the room, and …
15 Oct 2021

Most Popular

Why the world’s most important economic data release has unnerved markets
US Economy

Why the world’s most important economic data release has unnerved markets

The US added only 194,000 jobs in September, far shorter than the 500,000 that were expected. John Stepek explains why markets didn't react as they no…
11 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
Inflation is still one of the biggest threats to your personal finances
Investment strategy

Inflation is still one of the biggest threats to your personal finances

Central bankers and economists insist inflation will be gone by next year. We're not so sure, says Merryn Somerset Webb. So if you haven’t started to …
1 Oct 2021