There’s more to come in the M&A boom
Equity markets nearing all-time record highs, interest rates still low and a weak pound have created a cauldron for mergers and acquisitions (M&A) that analysts anticipate continuing while current market conditions persist.
Two FTSE 100 companies have already been acquired this year, a third looks set to go and with two more facing bids, 2018 is already one of the busiest years for FTSE M&A in recent times.
City A.M. asked analysts if they thought the M&A maelstrom would continue, which companies could be targeted next and if the current frantic dealmaking signalled a market that was nearing its peak.
Read more: Retailers feel the heat as M&A activity drops by £600m in one year
“A possible bidding war for serviced offices provider IWG would be merely the latest takeover drama that has enlivened the UK stock market in 2018 – and in the process enriched investors, who could now be forgiven for trying to identify the next potential targets for a predator, especially as the latest decline in the pound means British assets are cheaper for overseas buyers,” says Russ Mould, AJ Bell investment director.
FTSE constituents GKN and Ladbrokes have both been acquired already this year by UK firms Melrose and GVC respectively. Sky finally received an approach from US-based Comcast, Smurfit Kappa is being bid on by New York-listed International Paper and the long pursuit of Shire by Japanese rival Takeda looks close to concluding.
Laith Khalaf, senior analyst at Hargreaves Lansdown, argues another driving factor behind the hot market could be chief executives looking to close deals while money is still cheap.
“We are late in the cycle, so that tends to mean you get M&A. Combined with that, interest rates are climbing, the era of cheap money is coming to an end and if you are funding M&A activity via debt you are drinking in the last-chance saloon,” he says.
David Madden of CMC Markets agrees, adding: “The cost of borrowing is going up and if you are funding [M&A] through borrowing you will want to get your skates on.”
Mould argues that five further companies are ripe for a takeover approach: broadcaster ITV, challenger bank OneSavingsBank, energy company SSE, telecoms business TalkTalk and bookmaker William Hill.
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ITV, a perennial subject of takeover speculation, saw its share rise more than seven per cent on Friday after brokers tipped it as a potential target.
Ken Odelunga, a market analyst at City Index, says: “Logically you think its the last one on the shelf – it has had some issues and it doesnt appear to have any channel towards newer forms of broadcast.”
The challenger banking sector, which has failed to shake-up the banking market in the way that some predicted, is also one that analysts say could see further dealmaking.
Clydesdale and Yorkshire Banking Group has launched a £1.6bn bid for Virgin Money and Aldermore agreed a deal with First Rand in November.
Madden says: “It is tough for those guys, the regulatory demands for some of them are a little bit too onerous and there is switching inertia.”
In the energy sphere, Mould argues that SSE may be a target if the proposed merger of its retail energy supply business with Npowers goes ahead. He also cites Talktalk as of possible interest in the hyper-competitive telecoms sector.
Meanwhile William Hills new chairman Roger Devlin said proposed legislation to cut the maximum stake for fixed-odds betting terminals (FOBTs) to £2 could leave the company vulnerable to a foreign takeover bid, according to reports last week.
However, a US Supreme Court ruling on Monday that struck down legislation that restricted betting on sport sent bookmakers shares soaring, changing the likelihood of a successful approach.
Read more: Paddy Power Betfair confirms it is in talks for FanDuel merger
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