The UK Takeover Wave: Who Is Buying Britain's Cheap Stocks

Check the claimThree claims about the UK takeover wave

ClaimMost UK bids come from British buyers.Tap to checkMythOverseas bidders account for 94% of this year's bid value, on White & Case's count.Flip backClaimBoards that reject the first offer usually lose the deal.Tap to checkMythIntertek rejected EQT's first proposal of £51.50 a share and agreed at £60.Flip backClaimA big premium means shareholders got a good price.Tap to checkMythDeliveroo's 44% premium still valued it at less than half its listing price.Flip back

How big is the UK takeover wave?

Every count says this is a record-scale year, though they measure different things. Slaughter and May put the value of UK takeovers at £65bn by the end of the summer, up 97% on the same point last year, with four offers above £5bn against none in the whole of last year. LSEG, which counts all deals for UK targets including unlisted ones, logged more than $231bn by midyear, a total beaten only once since its records began, Reuters reported.

The deals are also much bigger. Law firm Davis Polk counted 25 firm offers in the first half against 37 a year earlier, but their value rose from £22.1bn to £35.4bn. The average offer more than doubled, from £597m to about £1.4bn. Small deals have not gone away: 64% of offers were for less than £250m, and 40% were for companies on AIM, London's junior market.

Fewer bids, but the average one more than doubled in size

2505007501,0001,250£1,500m0

£597m

£1,400m

First half, last yrFirst half, this yr

The FTSE 100 is being hit, not just the mid-caps. Gibson Dunn lists six FTSE 100 companies that have agreed deals this year: easyJet, Schroders, Beazley, Intertek, DCC and SEGRO. Prologis's £14.3bn ($18.9bn) offer for SEGRO, the warehouse landlord, is the biggest deal under the Takeover Code since Takeda bought Shire and Comcast bought Sky eight years ago.

Who is buying UK companies?

Foreign buyers, mostly with cash and borrowed money. US bidders made 17 firm offers worth £47.3bn, and continental Europeans 11 worth £22.6bn, White & Case found. About 60% of overseas bids went after UK companies that earn most of their revenue abroad. That's the key to the trade: buyers get global businesses at London prices.

US buyers alone bid nearly two-thirds of this year's total

Bids so far this year£75.0bn

• 63.1%£47.3bnUS bidders
• 30.1%£22.6bnContinental Europe
• 6.8%£5.1bnEveryone else

Cash has become the norm. Davis Polk found 76% of first-half offers were cash-only, up from 67% last year and 62% two years ago, and 64% used some debt. Debt has been easy to raise: Gibson Dunn noted that leveraged loan issuance just had its strongest month in a decade. Mitie's buyer, OCS, owned by PE firm Clayton, Dubilier & Rice, lined up a £4.8bn financing package at about 4.65 times earnings before interest, tax, depreciation and amortisation (EBITDA), a high level of leverage.

Bids are increasingly paid in cash, and funded with debt

Cash-only offersOffers using debt

20406080%0

62%48%

2 yrs agoCash-only offers62%Offers using debt48%

67%56%

Last yrCash-only offers67%Offers using debt56%

76%64%

This yrCash-only offers76%Offers using debt64%

2 yrs agoLast yrThis yr

Which deals defined the UK takeover wave?

The wave built over three years. Two years ago a consortium led by CVC, Nordic Capital and an arm of the Abu Dhabi Investment Authority agreed to buy Hargreaves Lansdown, Britain's biggest investment platform, for 1,140p a share, about £5.4bn, International Adviser reported. That was a 54.1% premium, after two lower offers were rejected. Czech billionaire Daniel Křetínský's EP Group paid 370p a share, £3.57bn, for Royal Mail's owner, International Distributions Services, a 72.7% premium according to the offer document. The government kept a £1 "golden share". International Paper beat Mondi to DS Smith with an all-share deal worth £5.8bn, a 47.7% premium.

Last year the premiums got bigger. KKR won a bidding war with Advent for Spectris, the precision instruments maker, at £41.75 a share against an undisturbed £20.38, a 104.9% premium, Investing.com reported. Qualcomm paid 183p for chip designer Alphawave, 96% above its undisturbed 94p, per the deal announcement.

Premiums on the signature deals ranged from 44% to over 100%

Spectris (KKR)104.9%

Alphawave (Qualcomm)96.0%

Royal Mail owner (EP)72.7%

Hargreaves Lansdown54.1%

DS Smith (IP)47.7%

Mitie (OCS)45.0%

Deliveroo (DoorDash)44.0%

Offer price over the undisturbed share price, as each deal reported it.

This year the targets got bigger still. EQT agreed to buy testing group Intertek for £10.6bn. Apollo beat Castlelake for easyJet at 715p a share, about £5.7bn. KKR and Energy Capital Partners agreed £5.75bn for DCC, Nuveen £9.9bn for Schroders, Zurich £8.2bn for Beazley. In the FTSE 250, ABB agreed £4.1bn for Rotork and OCS £3.1bn for Mitie. The run kept going after the summer, with PE-backed bids for Bodycote (£1.64bn) and Gamma Communications (£1.015bn).

From platforms and post to warehouses and airlines

1. 2 yrs agoHargreaves Lansdown, Royal Mail, DS SmithPE, a Czech billionaire and a US rival; premiums 48% to 73%
2. Last yrSpectris, Alphawave, DeliverooBidding wars and tech buyers; Spectris more than doubled
3. This yrIntertek, Schroders, Beazley, DCC, easyJetSix FTSE 100 companies agree deals
4. This yrSEGRO to Prologis£14.3bn, the biggest Code deal in eight years
5. LatestBodycote, Gamma, CapricornFour offers on a single day after the summer

How does a UK takeover work under the Takeover Code?

The Takeover Code, policed by the Takeover Panel, gives UK bids a fixed shape. Once a bidder is named, usually after a leak or a target announcement, Rule 2.6 gives it 28 days to "put up or shut up" (PUSU): make a firm offer or walk away, per Herbert Smith Freehills' guide. Only the target can ask for an extension. A bidder that walks away is normally barred from bidding for six months. When Advent lost Spectris, the Panel barred it from returning for 12 months without consent.

A firm offer is then completed in one of two ways. A scheme of arrangement is a court-supervised vote: it needs a majority in number of the shareholders who vote, holding at least 75% of the shares voted, then a court's sign-off. A contractual offer needs acceptances from holders of more than half the shares. At 90% the bidder can force out the rest. EP Group used an offer for Royal Mail's owner: it completed at 80.06% acceptances and began buying out the rest after passing 90%.

Every UK bid runs the same clock

1. Private approach (Board says yes, no or talks) to Bidder named (28-day PUSU clock starts)
2. Bidder named (28-day PUSU clock starts) to Firm offer (Price becomes a floor)
3. Bidder named (28-day PUSU clock starts) to Walk away (Usually barred for six months)
4. Firm offer (Price becomes a floor) to Scheme vote (75% of shares voted, then court)
5. Firm offer (Price becomes a floor) to Contractual offer (Over 50%; squeeze-out at 90%)

That 75% bar gives shareholders real power. DCC, whose takeover runs under Ireland's similar code, came close to losing its vote. Founder Jim Flavin said he was "astounded" by the board's backing, and Aviva and Fidelity called it a "bad outcome", Financial News reported. The vote results show 78.09% of votes cast in favour.

Why do bids keep getting bumped?

Because saying no works. Under the Code an announced price is generally a floor, and once a proposal is public, Slaughter and May notes, shareholders treat it as "the starting point for negotiations rather than the end point." Spectris switched its recommendation four times as Advent and KKR traded bids.

A bidding war took Spectris to more than double its undisturbed price

10203040£500

£20.38

£37.63

£40.00

£41.00

£41.75

UndisturbedAdventKKRAdventKKR final

A bidder can stop the bumps by declaring its price "final", which binds it unless a rival appears. Prologis did that for SEGRO after three proposals rising from 925p to 998p a share. EQT did it for Intertek two days before its PUSU deadline.

Make a guess

Intertek's board rejected EQT's first proposal of £51.50 a share. How much more did holders get by holding out?

Tap your guess

Under 5%Your guess5% to 10%Your guess10% to 20%Your guessOver 20%Your guess

01234567890123456789.0123456789%Final price over first proposal

Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 16.5%.

16.5%. EQT went to £54, then £58, then a final £60. The board had called the first bid one that "fundamentally" undervalued the company.

Hostile bids, made without the board's backing, are rising too. Peel's £582m cash bid for property developer Harworth was the fifth hostile bid this year, more than in any of the previous ten, Gibson Dunn found. Peel already owns 29.9%, just under the 30% line at which the Code normally forces a holder to bid for the whole company.

What does a bid premium mean for a shareholder?

Take a worked example. Say you held 1,000 Hargreaves Lansdown shares before the consortium's first approach. The 54.1% premium on 1,140p works back to an undisturbed price of about 740p, so your stake was worth about £7,400. The offer paid £11,400, including a 30p dividend. That's a £4,000 gain, about $5,280, overnight. In an ISA, the UK's tax-free savings account, you keep it all. Outside one, a cash takeover counts as a sale, so any gain becomes taxable that year, whether you wanted to sell or not.

The useful question is how many years of normal returns that premium pays you upfront. A 54% premium is worth about five years of 9% annual returns, delivered at once. If you think the business would have compounded faster than that, the premium is less generous than it looks.

A 40% premium pays about four years of returns upfront

Pick the bid premium and the return you expected from holding

Bid premium

30%40%50%

Expected annual return

6%9%12%

Years of returns paid upfront4.5 yrs3.0 yrs2.3 yrs5.8 yrs3.9 yrs3.0 yrs7.0 yrs4.7 yrs3.6 yrs

2.3 yrs7.0 yrs

Two more details matter. After a bid is announced, the shares usually trade a little below the offer, because the deal could still fail; Deliveroo jumped to 171.9p on the first day after DoorDash's 180p proposal. And if you're paid in the bidder's shares, your price keeps moving after the deal. Direct Line holders who took part of their payment in Aviva shares are well ahead; Tyman holders paid partly in Quanex shares are not.

Paid in shares? Your price kept moving after the deal

Aviva (bought Direct Line)58.0%

Dauch (bought Dowlais)20.6%

International Paper (DS Smith)9.5%

Quanex (bought Tyman)−42.4%

Bidder share price change from the firm offer announcement to late in the summer.

Are UK shareholders selling too cheap?

Often, yes, measured against long-run value rather than the undisturbed price. The undisturbed price is a low bar: it's the price at which nobody but the bidder wanted more shares. Spectris had lost half its value from its peak five years ago before talks began, so KKR's 104.9% premium roughly took it back to where it once traded. Deliveroo sold for less than half its listing price.

Buyers pay big premiums because they expect to earn far more. AJ Bell sums up the PE playbook as buying cheaply, adding debt, growing EBITDA and selling later at a higher multiple. A 40% premium is affordable if the price is low enough to start with. The bidder's return is, in large part, value the selling shareholders gave up.

The case that holders sold too cheap is stronger than the case they didn't

A fair exit

• Premiums of 40% or more, in cash, now
• Deals clear a 75% vote
• No local buyer was paying more

vs

Sold too cheap

• Premiums start from depressed prices
• Buyers expect to resell higher
• Holding out won Intertek 16.5% more

The counter-argument is real. UK-focused funds have had a record £13.9bn of outflows over twelve months, the OpenBook analysis notes, so there is no domestic buyer waiting to rerate these stocks. For many holders the realistic alternative to a 40% premium was not fair value next year; it was the same discount for years. That's why most deals still pass, and why big investors increasingly push for a higher price rather than reject the deal.

Why are FTSE 250 companies such popular targets?

Three reasons line up. First, price. The MSCI UK index traded at 12.85 times forward earnings over the summer, against 20.37 times for MSCI USA, per Aurelion Research. That's a price-to-earnings gap of about a third, and our piece on companies leaving London covers the other side of the same story.

UK shares cost a third less than US shares per pound of earnings

510152025x0

12.9x

15.5x

20.4x

MSCI UKMSCI EAFEMSCI USA

Second, currency. At about $1.32 the pound sits near the bottom of its range over the past year, so a dollar buyer gets more company per dollar. A stronger pound is one of the two things most likely to end the wave; the other is the cost of debt, with 10-year gilt yields around 5%. Third, the businesses are global. About 57% of FTSE 250 revenue is earned overseas, so a US or European buyer is often buying an international business at a UK price.

The targets cluster where those factors are strongest. Industrials led with nine offers worth £25.5bn, financial services had eight worth £19.8bn and real estate five worth £15.2bn, White & Case found. These are cash-generative, asset-backed businesses that support borrowing.

Industrials have drawn the most bid money this year

Industrials (9 offers)£25.5bn

Financial services (8)£19.8bn

Real estate (5)£15.2bn

The bids have even moved the index. The FTSE 250 hit a record during the summer, beating its old peak from five years ago, and one analysis argues bids explain the move better than fund buying does.

Premium estimates for this year depend on who's counting and what they count, which is worth knowing before you anchor on one number.

This year's average bid premium is somewhere between 37% and 45%

Gibson Dunn, latest month37%

Davis Polk, first half40%

AJ Bell, all deals43%

AJ Bell, public terms45%

30%35%40%45%50%

Should you buy cheap UK mid-caps as takeover targets?

Not as the main reason. Even in a record year, the £69.3bn of live or completed bids AJ Bell tallied by midsummer was 2.4% of the combined value of the FTSE All-Share and AIM. The other 97.6% got no bid. AJ Bell itself warns that chasing takeover premiums "is not a sensible investment strategy." If you pick ten cheap mid-caps for a bid, odds are most of them never get one.

What the wave does tell you is that cheap UK companies with steady cash flow, little debt and global sales are probably undervalued, because informed buyers keep paying 40% more for them. AJ Bell's screen for likely targets looks for exactly that: a low price relative to EBITDA, modest debt and strong free cash flow. Buy those on their own merits, and a bid becomes a bonus.

Find the number

Which of these would make a mid-cap most attractive to a buyer planning to borrow?

AJ Bell's takeover-target screen

A famous brand with a loyal following Low price relative to EBITDA, with net debt under three times EBITDA A share price that has rallied hard this year A large founder or PE shareholder

Tap the phrase you think is the tell.

Spotted it.Not that phrase. The screen looked for EV to EBITDA below 10 times, net debt no more than three times EBITDA and free cash flow above 10% of total assets.

• “A famous brand with a loyal following” Nice to have, but a brand doesn't pay interest.
• “Low price relative to EBITDA, with net debt under three times EBITDA” Cheap earnings and room to borrow are what let a buyer pay a premium and still earn its return.
• “A share price that has rallied hard this year” A rally makes the bid harder: the premium is measured from a higher price.
• “A large founder or PE shareholder” That can block a deal as easily as enable one.

Explain every phraseHide the other explanations

What could end the wave?

The caveats are short. A stronger pound or higher borrowing costs would cut what buyers can pay. Governments can block or reshape deals on national security grounds, as Royal Mail's golden share shows. All-share deals hand you the bidder's risk. And a bid can collapse after the shares have jumped, leaving late buyers holding the loss.

Our read

The UK takeover wave is a market verdict that London has been pricing its mid-caps too low. Buyers are paying around 40% premiums, mostly in cash and largely with borrowed money, and still expect to make money. That is hard to square with the idea that the undisturbed prices were fair.

For holders, the lesson is to treat a first offer as an opening bid. Intertek, Spectris, SEGRO and Hargreaves Lansdown all got more after saying no. Measure any offer against what you think the business is worth over five years, not against last month's share price.

For buyers, cheap UK mid-caps are worth owning, but on their own merits. Pick companies you'd happily hold for years at today's price. The bid is a free option that pays out for a few each year, not a strategy.

The risk is that the wave keeps taking the best businesses off the market at discount prices, which leaves the remaining index weaker. That's a reason to own the kind of company bidders want before they arrive, not to wait for them.

Go deeper

• Valuation and expectations: work out what a depressed undisturbed price assumes, and whether a bid really pays for the future.
• Reverse DCF: test whether a takeover price is generous or cheap before you vote.
• Debt and liquidity: see why buyers prize low-debt, cash-rich targets they can borrow against.

Members get our full research on the UK market and the companies we're watching. Join here.