UK mid-cap stocks have a takeover problem

UK mid-cap stocks have a takeover problem – one that sums up the trouble with investing in anything from growth companies to turnaround plays in the UK stock market.

Take the bid by US firm Prologis for UK property company Segro. As a holder of both Prologis and Segro shares, I should not be too bothered. Yet in practice, this looks like a pretty rough deal for Segro shareholders who want to stay invested. They swap a focused UK and European logistics investor for part of a much larger group that has 84% of its business in the US, at a valuation that seems favourable to Prologis. To make it worse, the dividends – the key thing, since you buy a business like this for income – will then be subject to US withholding tax. Who gains here?

So we get the usual silly takeover dance as the target gets bullied into submission by short-term investors desperate for the sugar hit of a quick capital gain. The only thing more ludicrous than Prologis's faux-concern about Segro's ability to execute its ambitious growth plans is the way that an offer worth 993p is “highly opportunistic”, but one at 1,032p (not even 4% more) is something that the browbeaten board now “would be minded to recommend”.

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The pool of opportunities is constantly shrinking, while the balance of risks and rewards get worse. Make the right call and you stand a good chance of seeing your winners bought out at a still-ungenerous valuation, capping your upside far lower than it should be. Meanwhile, the average quality of what remains behind is likely to decline – many of them will be stocks that do not attract buyers for good reasons.

The absence of good new listings coming to London is why this takeover wave is much more concerning than the one we saw in the mid-2000s, which I was relaxed about at the time. In hindsight, I should have been more concerned because that surely helped lay the foundations for what is happening today.

However, the real tipping point was the bewildering decision to allow SoftBank to buy Arm in 2016 – a call that almost no government anywhere else in the world would have made. That signalled everything was up for sale.

The true market for UK mid-cap stocks

This is a key reason why it is hard to be bullish on the FTSE 250, which has lagged the FTSE 100 for years after historically beating it. There are other factors, but the loss of roughly 150 mostly decent stocks (large, mid and small) from the UK market since 2023 must play a part.

The unhealthy combination of hollowing out and pitiful valuations means that while we think of the FTSE 250 as the benchmark for UK mid-cap stocks, it does not really look like one anymore. By modern size definitions, the true market for UK mid-cap stocks is roughly the bottom 40 of the FTSE 100 and the top 100 of the FTSE 250.

There are clearly opportunities in the UK. However, the best prospects lie with either an all-cap equity fund or specialist small-cap trusts such as Rockwood Strategic (LSE: RKW) instead of trying to earn any kind of intrinsic mid/small premium from such a neglected market.

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