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When Jeremy Hunt stands up to deliver the UK Budget on Wednesday, one question will be what the chancellor has to offer London’s hard-pressed equity market.
UK investors can only ponder the domestic market’s enduring discount as US markets again soar on mounting tech frenzy. Cash-rich buyout groups have been quick to return to what has been a favourite hunting ground. Strategic buyers are also taking advantage of cheap assets.
Paul Singer’s Elliott Management is after troubled retailer Currys, an offer pitched at a 43 per cent premium to where the shares were trading. Superdry founder Julian Dunkerton is pursuing his own take-private efforts. Wincanton, being bought by US group GXO, looks set to leave the market at a vast premium — telecoms equipment business Spirent too. This only fuels angst about why London’s public investors ascribe less value to listed companies than these buyers do.
What else may be being picked over? For buyout barons and strategics alike, a bargain valuation and a relatively open shareholder register help. A Lex screening produced a long list of companies that could fit the bill. Currys came second on the list overall behind Mobico Group, the bus and coach operator that used to be called National Express and ahead of budget airline Wizz Air.
Starting with the FTSE All-Share index, Lex first excluded banks, funds and companies under £250mn of market capitalisation. We also excluded companies with a free float of less than 75 per cent and those with leverage ratios — net debt to ebitda — of more than three times. This knocked out many potential targets including online fashion group Asos, card retailer Moonpig and furniture group DFS.
Performance is the next piece of the jigsaw. Lex looked at a combination of absolute share price movement and relative change against developed market sectors over the past five years or since listing. Building materials group Marshalls and outsourcer Capita scored worst on this metric.
Then add the UK market discount into the equation. Lex compared forward earnings multiples to relevant developed market sectors. Media groups Future and ITV were two of the cheapest scoring on this metric.
The final metric looked at profitability, which every self-respecting buyer thinks they can transform. This focused on trailing return on equity against that in comparable sectors. Wizz Air, audiovisual manufacturer Videndum and IT services group NCC all recorded poor scores.
Efforts to reform UK pensions, and boost domestic stock market investment, are proceeding slowly. Meanwhile, those running the numbers on pound-shop Britain will still be finding appealing prospects.
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