Companies which sit in the middle of the market capitalisation range, represented in the UK by the FTSE 250 index, by definition have the potential to become the next large-cap leaders.  

Unlike small caps, mid caps are big enough to have built a stable business supported by a strong balance sheet, but in contrast to large caps, still have the potential to grow for decades to come.

The problem is, in recent years, many of the UK’s most promising, high-quality mid-cap businesses have been acquired, either by private equity buyers or overseas companies looking to take advantage of the UK’s cheap valuations.

In this feature we look at companies that have disappeared from the market and pose the question, are there any quality mid caps left worth investing in?

Purely from a valuation perspective, the UK looks relatively attractive, reflecting a market almost universally unloved, suggesting it might be a good hunting ground for finding hidden gems in the mid-cap space.

An interesting observation on investor sentiment and valuation comes from fund manager Thomas Moore at Abrdn Equity Income (AIE), who notes it is highly unusual for the FTSE 250 index to offer a higher dividend yield than the FTSE 100.

The parlous state of the mid-cap market is summed up by Julian Cane, portfolio manager of CT UK Capital and Income Investment Trust (CHI).

‘Undoubtedly, the sustained volume of outflows from UK equity funds over many years has resulted in relatively low valuations, which in turn is bringing about corporate activity,’ explained Cane.

‘Institutional shareholders need to raise capital and therefore are more likely to accept bids to take the premium now, rather than stay invested and hope for higher returns later.’

Cane says this is not yet impacting his ability to find attractive companies, although he concedes it isn’t healthy for the long-term future of capital markets.

Like Thomas Moore, Cane believes mid caps are at very depressed levels relative to the rest of the UK stock market which itself is trading at an ‘undemanding’ valuation.

In other words, a tantalising double discount appears to be hiding in plain sight, ready to be exploited by patient, long-term investors.

Fund manager Alexandra Jackson at Rathbones UK Opportunities (FUND:B7FQM50), which invests in quality growth companies, expressed ‘excitement’ about UK mid caps.

‘After an unusually lengthy period of underperformance, we believe this market is a coiled spring ready to bounce back,’ enthused Jackson.

‘Valuations for the whole UK market are low, but for mid caps they are even lower than normal. Meanwhile, earnings growth expectations are much higher for mid caps than for large caps.’

The Shares team have put their collective heads together and later in the article we present some of our best ideas in the UK mid-cap space, including companies on AIM or those which do not necessarily qualify for the FTSE 250 index.

Before that, it is worth reminding readers of some UK mid-cap ‘gems’ which have disappeared in the last few years.

Data compiled by Shares shows that of the 30 bid approaches seen year to date, worth a total value of £11.2 billion, the average takeover premium has been 34%, a significant reduction on the 45% seen in 2024 which comprised nearly 50 takeovers worth £49 billion.

Roughly two-thirds of the takeovers this year have taken place among mid caps, providing further evidence the UK market is seen as an attractive hunting ground for private equity and overseas companies.

Some of the bigger takeovers valued at over one billion pounds include US food delivery giant DoorDash (DASH:NASDAQ) swooping in for an all-cash £2.7 billion bid for Deliveroo (ROO) at 180p per share for a relatively meagre 23% premium.

Another corporate takeover saw sandwich maker Greencore (GNC) swallow up the private label pizza-to-hummus company Bakkavor (BAKK) in a cash and shares offer worth £1.2 billion or 200p per share, equivalent to a 32% premium to Bakkavor’s undisturbed share price.

The merger will create a leading UK convenience food business with meaty combined revenue of roughly £4 billion, strengthened commercial ties and the potential to deliver tasty synergies. The transaction still needs regulatory approval.

On 9 April, the board of healthcare facilities provider Assura (AGR) recommened an all-cash offer for private equity firms KKR and Stonepeak worth £1.6 billion or 49.4p per share.

The offer represented 100% of Assura’s EPRA net tangible asset value per share as of 30 September 2024 and a 32% premium to the undisturbed closing price of 37.4p on 13 February.

However, rival trust Primary Health Properties (PHP) made a counter-offer in  cash and shares based on an adjusted asset value basis, which the Assura board, under pressure from major shareholders, is now considering.

Analysts at Panmure Liberum are in favour of a combination with PHP, pointing out the potential for cost and operating synergies and the lower cost of capital resulting from scaling up the business.

OTHER GEMS WHICH HAVE LEFT THE MARKET

One of the best-performing companies ever to list on the stock market was video games services specialist Keywords Studios, before it succumbed to an all-cash £1.95 billion private equity takeover from EQT pitched at a 67% premium in May 2024.

Another fast-growing success story to leave the market was all-day bar and restaurant operator Loungers, which was snapped-up by private equity group Fortress – which already owns wine merchant Majestic among other consumer-facing businesses – in November 2024 for £338 million, at a 37% premium.

In the ever-shrinking UK technology sector, cybersecurity leader Darktrace was acquired by Thoma Bravo for nearly £4 billion in April 2024 at a relatively skinny premium of 20%, bringing to a close its short and tumultuous time on the stock market.

Darktrace became the target of short sellers after US hedge fund Quintessential Capital questioned the company’s accounts, although an independent investigation by consultancy EY found no evidence of any wrongdoing.

One of the most notable deals of recent years was the takeover of Hotel Chocolat in November 2023 by the Mars family, which paid half a billion pounds or a 170% premium to the company’s market value in an all-cash transaction.

SHARES STOCK PICKS

Morgan Sindall (MGNS)

Price – £37.50

Market cap: £1.76 billion

Regular readers may recall we tipped infrastructure and urban renewal group Morgan Sindall (MGNS) in May last year at £23.52 on the basis the shares were trading too cheaply for the company’s growth prospects.

After a near-60% rally, the shares are no longer cheap, but neither are they expensive – we would consider them ‘fair value’ here, and to quote Warren Buffett it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Since the start of 2025, trading has been better than expected, and looking ahead the firm’s high-quality order book provides ‘strong confidence of delivering a full-year performance in line with our current expectations,’ says chief executive John Morgan.

The Fit-Out division in particular has seen ‘very strong’ trading momentum and is likely to beat its medium-term annual operating profit target of £60 million to £85 million.

Our confidence in the quality on offer here is underpinned by its 22% return on capital employed and 22% return on equity. [IC]

Telecom Plus (TEP)

Price – £20.65

Market cap: £1.65 billion

On the face of it, Telecom Plus (TEP) is a dull utility business. So far, so boring. Dig a little deeper, however, and you’ll find a genuine diamond in the rough business.

Trading under the Utility Warehouse banner, the company runs a unique ‘multi-utility’ model that bundles core energy services with things like, home phone, mobile and broadband, and more recently home insurance and boiler cover.

The more services you take, the larger the savings, and there’s a cashback card too, with partners like Sainsbury (SBRY), Boots, Aldi, Primark and B&Q, with savings totted up each month and knocked off your utility bill.

Marketing costs are kept down by using its customers as sales partners, who get rewarded when friends and contacts sign up, making customers feel part of a growing family, many of whom become shareholders too.

With more than one million customers to date, management want to double that ‘over the medium-term,’ and why not, it’s a model that’s been working for years, and it’s been paying off for investors.

CAGR, or compound annual growth rates, have been 20% and 16% respectively for revenue and earnings over the past five years, compared to the single-digit growth of other utility companies.

Annualised total returns over the past decade come in at 12.5%, versus 6.7% of the FTSE 100 and SSE’s (SSE) 5%, a divergence which would make a big difference to investors’ portfolios over time. [SF]

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