UK Companies Face Takeover Wave Amid Depressed Valuations

Jeremy Fry was typical of the characters one would encounter in British business 30-40 years ago.

A scion of the Frys, the Bristol Quaker family that in 1761 founded the company behind the world's first mass-produced chocolate bar, he was educated at Gordonstoun — the tough Scottish boarding school King Charles attended — before joining the Royal Air Force during the Second World War.

After the war, he sought a career in motorsport, joining his brother's business with the aim of designing, building and racing a 500cc hill-climbing car.

A close friend was Alec Issigonis, the design and engineering genius behind the Mini, one of the 20th Century's most iconic vehicles.

Fry himself proved no mean inventor, creating a four-wheel-drive wheelchair with power steering called the Squirrel and a high-speed marine landing craft, christened the Sea Truck.

A collaborator on the latter was James Dyson, now Britain's most celebrated inventor, who began his career with Fry.

Fry's most important work, though, was reinventing the valve actuator, a device that opens and closes valves.

In 1955, nearly all pipeline valves were manually run, often requiring vast numbers of workers to operate them. Fry devised electrically controlled, mechanically powered actuators that could be operated remotely.

These were explosion-proof and waterproof, making them suitable for hazardous environments like chemical and oil refineries, sewage works and loading jetties. He probably saved countless lives.

But last Thursday, Rotork, which began making Fry's actuators in 1957 and became a global leader in its field, agreed to a £4.1 billion ($5.5 billion) takeover by the Swiss-Swedish engineering group ABB.

The same day, two more U.K. listed companies succumbed to takeovers, with Gooch & Housego, a global leader in photonics (light technology), accepting a £346 million offer from the U.S. private equity firm Arlington Capital. And Ramsdens, a pawnbroker, agreed a £200 million takeover by Nasdaq-listed FirstCash.

Yesterday, another domino fell, with the outsourced services group Mitie agreeing a £3.1 billion takeover by private equity-owned rival OCS Group.

The offers are part of a trend that has accelerated this year.

Before the latest takeovers, Charles Hall, head of research at the investment bank Peel Hunt, pointed out in a note that, since the beginning of 2023, there have been 154 bids — either completed or running — for U.K. companies with a market capitalisation of more than £100 million, and with a total value of £165 billion.

This year alone has seen three FTSE 100 companies — the Lloyd's of London insurer Beazley, the asset manager Schroders and the quality assurance specialist Intertek — agree takeovers, while two more — the energy services combine DCC and the industrial warehouse operator Segro — are currently the subject of takeover bids.

Former Footsie constituents Tate & Lyle and easyJet have also agreed to or received takeover approaches.

It is no exaggeration to call this a crisis.

In his note, entitled "Selling the family silver," Hall noted that, since the start of 2023, seven large U.K. companies — including the building materials giant CRH and the fintech Wise — had moved their listing, "taking around £120 billion of market cap with them," while eight U.K.-based companies, most notably the chip designer Arm Holdings, had chosen to list overseas, depriving the U.K. of a further £330 billion of market value.

He offers a number of explanations, including internationalization (executives, boards and shareholders are increasingly international and so less concerned about the domicile of the listing); the U.K.'s open markets; confidence (greater probability of deal completion encourages bid interest); flows of domestic capital from U.K. funds and the readiness of portfolio managers to accept offers, either to improve their performance or to meet redemptions.

Possibly the biggest driver is depressed valuations.

Steven Fine, Peel Hunt's chief executive, noted last Thursday that Rotork, Gooch & Housego, and Ramsdens had accepted offers respectively pitched at premiums of 73%, 41% and 49% to their prevailing share prices.

"That tells you just how undervalued many U.K. companies have become," he added.

One wonders when asset managers in the U.K. — who have less of a domestic bias than peers in similar economies — will wake up to that.