How to stop the private-equity takeover of Britain’s listed companies
Putting up barriers in the open market would make no sense. But there is another way, says Matthew Lynn. Just start valuing British equities properly.
![Shoppers in Morrisons](https://cdn.mos.cms.futurecdn.net/Mef8RxDMQJjxFBpRDJMQM4-415-80.png)
When bidding finally closed last weekend, the auction of Morrisons turned out to have been less exciting than many of the speculators had been hoping. Clayton, Dubilier & Rice, the original bidder, walked away with the prize at 286p a share, less than the shares were trading at in the week before the auction closed. At £7bn, whether the retailer will turn out to be a great investment remains to be seen.
Terry Leahy, the former Tesco boss, will be advising the new owners, and he has a formidable record in retailing. If anyone can make Morrisons a success, Leahy can. Yet it is hard to see how it can be magically transformed. Morrisons has languished in fourth place in its sector for the last 20 years and has no meaningful brand outside of its Yorkshire heartlands. The real lesson of the bid is that, if Morrisons is a target for private equity, then so is just about every firm on the FTSE 100.
The wave of bids washing over Britain
No one thinks the buyouts will end with this takeover. The UK is witnessing wave after wave of private-equity firms buying out major British companies. In the first half of this year, the buyout firms spent $45bn in the UK, with a total of 38 acquisitions, ranging from John Laing to G4S. That is double the amount spent in the first half of 2020 or indeed any of the last ten years. Sainsbury’s? Tesco? Either of them could be next. It is not hard to see a media company being bought, such as ITV or Pearson. Or indeed, one of the banks such as Lloyds. At this rate, in another few years there may be hardly any major companies left on the London market, and the entire UK economy will belong to a handful of private-equity firms based in New York and Tokyo.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Plenty of investment institutions in the City will feel uneasy about that. After all, there won’t be many companies left for British investors to put their money into. And, of course, the private-equity firms don’t have a great record. Lots of businesses are drained of cash, starved of investment, then dumped back onto the stockmarket a few years later. And yet the City also has a very easy way of bringing the waves of takeover bids to a sudden stop. Simply start valuing British equities properly.
There is no great mystery about why there are so many takeovers right now. It is because the UK market is cheap compared with the rest of the world. America’s S&P 500 and Europe’s Stoxx 600 have risen 65% and 18% respectively in the last three years; the FTSE 100 has fallen by 8% over that time. It trades on just 12.6 times forward earnings, compared to 21 times and 16 times respectively for those two rivals. In other words, if you want a bargain, and private-equity firms are always looking for one of those, then Britain is the place to come.
Let’s get the FTSE to 10,000
On top of that, our market is relatively open compared to most others. And, although it might not look like it right now, with fuel shortages across the country and labour shortages snarling up supply lines, the UK has good growth prospects. It is recovering from the pandemic as fast as most of its major rivals, it will soon have recovered from the disruption of leaving the EU, and it has plenty of new businesses and levels of venture-capital investment far higher than anywhere else in Europe.
The City can’t – and shouldn’t – do anything about it being an open market. It would be crazy to put up barriers to takeover bids. But it can fix the fact that UK equities are so cheap by increasing the weighting of the UK in the typical portfolio, and especially in the giant pension funds that dominate the market.
It is time the UK was re-rated and put on a par with other major markets around the world. If the FTSE 100 was at 10,000 we wouldn’t see any more takeover bids. They would be way too expensive. That may seem a distant prospect, but that is simply a measure of how poorly the UK market has done over the last 20 years. Once it hits those levels, and there is no reason why it shouldn’t, the wave of takeovers will stop dead in its tracks – but until it does, they will keep on coming.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
-
Regulator moves to protect access to cash amid branch closures and disappearing ATMs
News The Financial Conduct Authority has told banks to start assessing if local communities have adequate cash access from mid-September
By Marc Shoffman Published
-
VAT hike on private school fees could come earlier than previously expected
The government could start charging VAT on private school fees as soon as January 2025, according to the latest reports. What does it mean for parents?
By Katie Williams Published
-
UK mid-caps: an improving outlook
UK mid-caps have perked up and the rally may run further, but long-term investors should remain selective
By Cris Sholto Heaton Published
-
The tobacco industry is going smoke-free - how to profit from it
Tobacco companies have realised their traditional products are on the wane. But new opportunities have opened up – and should prove lucrative
By Rupert Hargreaves Published
-
Is it time to invest in creative industries?
Any industrial strategy should not overlook the creative industries, one of our top national assets
By David C. Stevenson Published
-
Is Mercia Asset Management set for success?
Mercia Asset Management helps the government fund smaller companies in Britain’s regions. Should you invest?
By Rupert Hargreaves Published
-
British stocks set for a boost
British stocks are due for a bounce as the UK looks more stable compared to many economies
By Alex Rankine Published
-
Ocado shares jump by a fifth
Ocado takes a turn for the better after attractive profit forecasts were announced
By Dr Matthew Partridge Published
-
The AI boom is on borrowed time
The hype around the AI boom could be on its way out – but why?
By Alex Rankine Published
-
Diploma: a blue-chip set for strong growth
Diploma, whose niche products include seals and fasteners, serves an array of growth markets. Should you invest?
By Dr Mike Tubbs Published