Why UK Plc Is About To Become More Attractive To Overseas Buyers Once Again

There were just 58 firm offers for UK businesses last year which, although higher than 2022, was relatively subdued compared with historical levels, according to analysis by investment bank Peel Hunt.

The cohort that seemed most willing to transact, were cash-rich private equity firms, which accounted for nearly a third of those deals. That was up from 25% the previous year and is perhaps the start of a longer-term trend.

But while activity was clearly muted last year, there are signs that 2024 will be better, with several big-name listed UK companies already in the sights of acquirers.

In the past few weeks, there have been bids for retailer Currys, telecommunications firm Spirent and challenger bank Virgin Money.

There are some very good reasons why that trend is set to continue in the coming months – and why UK firms could be top of buyers’ shopping lists.

Interest rates have peaked

A high interest rate, high inflationary environment causes uncertainty – and when there is uncertainty, takeover activity plummets.

That is partly because the targets themselves believe they can achieve a better price in a more benign economic environment. But it’s also because potential buyers don’t want to risk being saddled with a dud in a downturn.

However, while the UK is technically in a shallow recession – defined as two consecutive quarters of falling output – the outlook is improving.

Firstly, inflation has fallen relatively quickly since peaking at 11.1% in October 2022, with the Bank of England predicting it could hit its 2% target in Q2 this year – albeit temporarily.

That will increase calls for the central bank to reduce interest rates to remove the shackles from the economy and allow it to break free from the low-growth trap it finds itself in.

The consensus is that the Bank will be forced to cut interest rates as many as three times this year, potentially to as low as 4.5%.

If that happens, we expect M&A activity will increase and, because of lower borrowing costs here in the UK, domestic firms will become more attractive to overseas buyers.

UK companies are good value

As well as potentially lower borrowing costs, UK companies are considered ‘cheap’ relative to their international peers.

On a price-to-earnings basis – a key metric for assessing value – the UK market is currently trading at 16.2x. By comparison, US shares currently trade at 29x.

There are several reasons for this relative valuation gap, some of which are temporary, such as political instability and concerns over the health of the economy. Others, however, are more long-term, such as Brexit and the fact the London Stock Exchange has a dearth of technology companies, which are popular among investors and tend to achieve higher valuations.

The latter are structural weaknesses in UK markets and therefore there are no quick fixes, suggesting that the valuation gap is here to stay for the foreseeable future.

Therefore, the UK’s relative cheapness and the fact it’s home to several world-class companies, makes it an attractive market for those keen to acquire.

Government reforms are leading to welcome incentives

Over the past few years, critics have lambasted the UK Government for making the country a less desirable place to set up and grow a company.

However, it’s worth noting that the UK still scores highly in several indices measuring the ease of doing business.

Regardless, a cross-party political consensus has emerged over the need to make the UK a more welcoming place for entrepreneurs and other wealth creators.

For example, over the past 12 months Chancellor Jeremy Hunt has introduced what he called the “largest business tax cut in modern British history”, in the shape of full expensing, which allows businesses to write off investments against their tax bill.

He also claims his Mansion House reforms could unlock an additional £75bn of investment for high-growth UK companies by the end of the decade.

In the Budget, the Chancellor also announced plans for a new platform that allows private companies to trade their securities. The new Private Intermittent Securities and Capital Exchange System is designed to support companies to scale up and grow.

Is building key?

Meanwhile, Labour has been on a charm offensive to win over big business and has made economic growth a key pillar of its election campaign.

Separately, experts agree that reform of the UK’s labyrinth-like planning system is key helping businesses expand and thereby unlocking growth.

In a bid to “turbocharge” construction, the Government has tweaked planning rules and has been piling pressure on “underperforming” councils to speed up development on brownfield sites.

Labour has also pledged to be a party “for the builders and not the blockers” in a bid to build 1.5 million new homes over the next parliament. Experts argue that building more homes is key to improving productivity and therefore living standards.

Home to better business

While none of these measures in isolation is a silver bullet, there is clearly a determination to make the UK a more business-friendly country.

If politicians are successful in that pursuit, it will only increase the attractiveness of UK plc to overseas buyers.

But even if they aren’t, there is enough incentive for acquirers to cast an inquisitive eye at the UK market over the course of 2024.