By Ben Foster on 08/04/2024

UK M&A Market: Insights into Evolving Investor Behaviour

After two years of muted transaction activity, there are clear signs that the UK M&A market has woken up. This is being driven by growing confidence amongst corporates and a backdrop of historically low valuations for UK-listed businesses, especially in the mid and small-cap space. We have already seen a slew of transactions, including Barratt’s proposed merger with Redrow, Mondi’s bid for DS Smith, a bidding war for Wincanton won by GXO Logistics, and Nationwide’s agreed deal to acquire Virgin Money. The pipeline of future deals is also strong with companies like Direct Line in play.

What looks to be different this time is that investors are taking a more robust view of take-out valuations, particularly given the limited alternatives they have for deploying their cash in an IPO environment that remains subdued. As a result, they are being more aggressive on the price they are willing to accept. We have already seen public investor support for higher valuations at Currys, Wincanton and Direct Line.

This trend also plays out in transaction voting. Schemes of Arrangement remain the preferred deal structure due to the finality of the vote and the clear timeline. Recent schemes, however, are becoming ‘tighter’. Research from our shareholder advisory colleagues shows that pass rates are generally coming down and that this push-back is mainly coming from the traditional ‘long-only’ investors. In 2018, only 3% of votes passed in the 75%-85% bracket, but this rose to 14% in 2023.

What does this mean in the current bid environment? Potential listed targets should be redoubling the communications of their growth prospects and their strategy for achieving them. Even if this does not have an immediate impact on their share price, it is likely to drive support for a higher valuation if a bid does come in. More than ever, boards need to be close to their shareholder registers and understand that initial feedback may not give them the full story. They also need to be prepared for the fact that a board recommendation no longer guarantees the vote. Most schemes are now incorporating retail campaigns due to concerns over the numbers test (scheme success depends on a majority of the number of votes in combination with at least 75% by value of the shares), or at least plan for a campaign even if not required.