UK shares have lagged their US and European counterparts significantly since 2016 leaving them vulnerable to takeover by more highly-valued peers and private equity groups which are still flush with cash, argue Shore Capital research analysts Rob Sanders and Chris Bottomley.

Since June 2016, at the time of Britain’s vote to exit the EU, the S&P 500 index has doubled, Japan’s Nikkei is up 80%, the German blue-chip DAX index is up 44% and the French CAC is up 54%.

By contrast, the domestically focused FTSE 250 index is down by 1.4% while the FTSE 100 is up 15.5% and the FTSE AIM All-Share is up 14% demonstrating broad-based underperformance.

Heading into 2024, the analysts reckon many UK companies are in a position where their undervaluation will be addressed ‘one way or another’.

In 2023 alone over 40 takeover deals have been completed or are due to complete across various sectors suggesting broad-based cheapness rather than concentration in one or two industries.

The targets have also been varied in terms of market capitalisation from small-caps like Best of the Best to heavyweights such as animal pharmaceutical specialist Dechra Pharmaceuticals (DPH).

From the beginning of 2017 to the end of September 2023, the value of mergers and acquisitions has topped £340 billion according to law firm Ashurst with an average premium paid of 35%.

Perhaps demonstrating increased confidence from bidders, the average bid premium in 2023 has risen to 60% which is the highest since 2020.

Odyssean Capital, which manages the Odyssean Investment Trust (OID), points out that UK shares trade at a 26% discount to fair value based on the Canaccord Quest valuation model compared with an average 20-year premium of 3%.

By the same measure, UK small- and mid-caps trade at a 28% discount compared with a 20-year average premium of 19%. These ratings are in stark contrast to the US market which trades at a 55% premium compared with a 20-year average premium of 39%.

Which stocks look vulnerable to a takeover approach? Shore Capital highlights language and technology specialist RWS (RWS:AIM) as ‘open’ for further takeover discussions given the ‘low valuation’ of the shares and the fact long-standing chairman Andrew Brode is moving to a non-executive role.

In 2022, Baring Private Equity Fund held preliminary talks with the company before walking away.

Shore’s Bradley Hughes believes all-day dining operator Loungers (LGRS:AIM) could be subject to an ‘opportunistic bid’ providing a full exit for private equity group Lion Capital which owns 26% of the group.

Hughes says he is ‘encouraged’ that Lion has been a net seller of shares since Loungers listed on AIM and thinks it would be ‘happy’ to exit completely.

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