Pair of increased takeover bids state the value case for UK equities

Frasers’ increased offer for Mulberry may well founder upon the blocking stake held by Challice but ABC Technologies seems to be winning over the board of TI Fluid Systems with its higher bid.

Both approaches suggest that trade buyers think there is value to be had in the UK equity market – a message that stock market investors still seem a bit reluctant to heed, judging by how the leading indices are paddling sideways again.

The premium offered by Frasers relative to the undisturbed share price of Mulberry now stands at 28%, and ABC feels able to go to a 37% premium and still generate a fair return on its investment.

Even they pale slightly compared to the average 44% premium across the thirty-odd bids for UK listed firms that have closed or are still ongoing in 2024 (and the 43% average premium across nearly twenty approaches that collapsed amid opposition from the respective companies’ boards, shareholders or both).

Ten largest takeover offers by premium in UK stock market, 2024

Source: RNS

A range of financial (private equity) and trade buyers therefore clearly think there is value to be had in the UK stock market, judging by how they have laid, or are laying, out £42 billion between them in deals that are closed or still live.

More than £50 billion has also been offered in deals that did not make it over the line, notably BHP’s £38.6 billion lunge for Anglo American and REA’s £6.2 billion dart at Rightmove.

Both of those failed approaches targeted FTSE 100 firms, and DS Smith and Darktrace are among other members of the UK’s elite index to receive takeover approaches, to suggest that buyers see value across a range of companies by size and industry. Rumours that another FTSE 100 firm, Hiscox, is in the sights of buyers are yet to come to anything more concrete.

Ten largest takeover offers by value in UK stock market, 2024

Source: RNS

These deals serve another purpose. Besides highlighting the potential value appeal of the UK stock market, they put cash back into investors’ pockets, even allowing for how some of the offers made come with a stock element to them.

There is an old saying that bull markets end when the money runs out, and right now investors are getting far more from the UK equity market than they are being asked to put in.

Analysts forecast the FTSE 100 will provide £78.6 billion in ordinary dividends this year, with £3 billion in special payments from HSBC on top, while the FTSE 250 is expected to provide another £10 billion or so.

Add in £50 billion of share buybacks from the FTSE 100 alone, plus a possible £42 billion in takeover proceeds (where the equity element can be readily liquidated) and the total cash yield from the FTSE 350 is over £180 billion, or more than 7% of its total stock market valuation.

That return exceeds the £11 billion in cash calls from primary and secondary issuance from London’s Main Market and AIM, to leave portfolio builders with plenty of liquidity to reinvest.

It also provides a total cash yield that easily exceeds inflation, the benchmark ten-year gilt yield and the Bank of England base rate, to make a further case for investing in UK equities based on the prevailing valuations.