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An increasing number of the UK’s larger companies are being taken off the stock exchange through acquisitions, in a blow to domestic fund managers who fear they are being left with a smaller selection of quality stocks they want to buy.
Thirty London-listed companies received firm takeover offers for an average value of £1bn in the first half of this year, according to data from investment bank Peel Hunt. That compares with 27 offers with an average value of £443mn in the first half of last year.
While providing a short-term boost to share prices, the removal of these stocks — coupled with London’s lack of success in attracting initial public offerings to replace them — has created a worrying dynamic for many fund managers whose job it is to buy attractive-looking UK stocks, and for the brokers who trade them.
“The UK is at risk of becoming a narrower market,” said David Cumming, head of UK equities at Newton, who has been a UK equity manager for more than 40 years. He expects the higher number of bids for London-listed companies to continue.
“More needs to be done to encourage investment into British stocks to prevent our equity market withering on the vine,” he added.
This month FTSE 100 company Rightmove was the subject of a bid from Rupert Murdoch-owned group REA, which it rejected.
Midsized companies in the FTSE 250 have also been a target. Tyman, which makes door and window parts, and telecoms testing group Spirent were both bought by US-listed companies this year.
Last week US miner AngloGold Ashanti agreed a £1.9bn deal to buy gold miner Centamin, removing one more mining company from the London stock market if the transaction goes ahead.
Foreign buyers have been attracted to the UK by the valuations on offer, which are often lower than those of US firms. The FTSE 100, for instance, trades on a price/earnings multiple of 15.1 times, compared with 26.8 times for Wall Street’s S&P 500 index.
UK fund managers typically benefit in the short term from such takeovers, with research by Peel Hunt showing that the average premium paid by buyers has ticked up to about 40-to-60 per cent since the coronavirus pandemic, from the long-term average of 30-to-50 per cent.
The wave of takeover interest has also helped the FTSE 100 and Mid 250 indices outperform Europe’s Stoxx 600 over the past six months, and has driven some hedge funds to avoid shorting — betting on a falling share — UK stocks.
But for managers who need to recycle the cash returned to them from these takeovers, the lack of options among existing UK stocks or new listings is causing concern.
“Without many IPOs, the overall quality is eroding over time — as well as the quantity — as good companies exit the markets without equivalent replacements,” said Michael Nicholson, head of mergers and acquisitions at Peel Hunt.
London has had nine IPOs so far this year, compared with 19 for the whole of last year, according to Dealogic. In 2014 there were 119 IPOs. The amount raised from IPOs this year amounts to $707mn, compared with $972mn last year. A decade ago, companies raised $27bn.
“Given that we are not seeing many companies listing in the UK this does, logically, mean the pool of listed companies is shrinking,” said Laura Foll, an equity income fund manager at Janus Henderson.
“This is not a dynamic we would want to see persist for any period of time,” she said, although she added that “it does, in the short term, serve to highlight the value on offer.”
The takeover activity comes on top of companies such as bookmaker Flutter and building materials group CRH which have moved their primary listings to the US.
More than 2,700 companies were listed on the London Stock Exchange’s main market in 1996, according to asset manager Schroders, but this had dropped to fewer than 1,100 by the end of 2023. Europe and the US have suffered a similar trend, albeit to a lesser degree, as the growth of the private equity industry allows firms to stay private for longer.
Policymakers are trying to make London a more attractive venue for flotations through a series of measures.
These include plans to encourage pension funds to allocate more capital to UK stocks. The amount of British pension and insurance funds’ investment portfolios invested in UK-listed equities has fallen from about half to 4 per cent over the past two decades, according to data from investment bank Ondra Partners last year.
In July the Financial Conduct Authority announced an overhaul of the UK listing rules in an attempt to revive its capital markets.
Many managers remain hopeful that the exit of companies can be reversed.
“It would be a problem if we had five years of this,” said James Lowen, UK equity fund manager at JO Hambro Capital Management, referring to the level of takeover activity. “This is why we think there will be policy action to stop this trend happening.”