What we can learn from the M&A bonanza

A few weeks ago, the M&A market was febrile. Now, it’s probably fragile. Suddenly faced with a very unsteady backdrop, the City’s dealmakers have likely already decamped to the beach.

With bid activity now likely on pause, and with one eye on a possibly calmer window between the summer holidays and the US election run-in, this could be a good moment for investors to take stock of the recent trends in acquisitions.

So far in 2024, data from FactSet suggests there have been 36 bids of at least £100mn for UK-listed companies. Of these, two are rumours, and a further 10 have been cancelled or withdrawn. Of the remaining 24, a third have completed, and the remainder are either moving forward, in discussions, awaiting a better offer, or subject to regulatory clearances.

Rumoured deals are always hard to pick apart. In the case of Rentokil Initial (RTO) – which has been in the crosshairs of a Philip Jansen-led private equity consortium, per a July Sunday Times report – the odds may have fallen, given Jansen has just agreed to chair WPP (WPP).

But rumours are worth tracking. Of the 27 companies that faced unconfirmed interest in the past decade, 11 were subsequently acquired, and in most cases by another firm. While 10 years is a long time in markets, that’s a much higher hit rate than for the average company, and suggests that rumours are sometimes a prelude to a deal (or a coded way to signal openness to a sale).

Investors in Serco (SRP), which according to Sky News briefly fielded interest from private equity group American Industrial Partners last year, should keep this in mind.

While we shouldn’t distil data on lots of unique situations into one ‘representative’ deal, a couple of trends are apparent. The first is that average premiums – defined as the uplift to the undisturbed pre-bid share price – have been around 33 per cent this year, whether the buyer is public or private.

Second, and while this may change, financial buyers have had a bit more success in getting deals signed. In all but one instance (Elliott Advisors’ tilt at Currys (CURY)), the deals that have collapsed have involved so-called ‘strategic’ buyers from within the target’s sector.

Here, a key challenge has been to sell a deal to public investors itchy at the prospective of dilutive empire-building. When deals more closely resemble a merger, such as packaging group Mondi’s (MNDI) attempt to buy peer DS Smith (SMDS), or BHP’s (BHP) swing for Anglo American (AAL), the scrutiny is much more intense; the process more laboured.

In both instances, initial approaches had to be sweetened before they were pulled (although in Mondi’s case, it was outmuscled by a rival bidder). But in each case, had the targets been a little easier to swallow – or the reputation-preserving instincts of its executives more brittle – there might have been more room to ‘play’ the M&A story.

Isa millionaire (and regular Investors’ Chronicle contributor) Lord John Lee says he recently adopted this approach with Britvic (BVIC), shortly after it told investors it had rejected offers of 1,200p and 1,250p from Carlsberg (DK:CARL). Though normally a long-term holder, John instinctively felt there was “an 80 to 90 per cent” chance of an improved offer, given that the beer giant is four times bigger, the low-ball nature of the initial bids, and the need for Carlsberg to be seen to execute. On 8 July, Britvic’s board backed a deal worth 1,315p a share. On which note, John and I return to podcasting duties at the beginning of September.