There’s a quiet re-rating going on in the UK stock market which suggests investors are slowly waking up to the bounty of value opportunities.

The non-stop takeover action was the biggest clue as to prizes up for grabs, given bids are still coming thick and fast. Trade buyers and private equity companies have been taking advantage of cheap valuations for multiple years, and now retail and institutional investors have finally got the hint that the UK is worth a closer look.

Between 2015 and 2020 (pre-Covid), the FTSE All-Share traded on between 13 and 16-times forward earnings. The market rating hit a low of 9.2-times in 2022 before beginning a steady ascent, which coincides with the boom in takeovers we’ve seen in recent years.

The FTSE All-Share is now trading on 12.3 times earnings, confirming the re-rating is in motion. However, the market is still cheap compared to history. If investors aren’t prepared to pay higher multiples of earnings, then the M&A juggernaut might keep trucking along as value opportunities will entice more takeovers.

BID PREMIUM TRENDS

Thirty-nine London-listed companies have been subject to takeover interest so far this year. The average bid premium – the extra bit above the market price – is 37% which compares to 47% for the whole of 2024 and 52% in 2023.

If the UK stock market on a broad is now trading on a higher valuation, it makes sense that the average bid premium is coming down. However, there are still chunky offers on an individual basis.

For example, private equity group Advent has proposed to pay 85% above the market price for industrial technology group Spectris (SXS). On the eve of the takeover approach, Spectris was trading on 12.7 times next 12 months’ earnings. It had gone through a bad patch, leaving it vulnerable to an opportunistic bid. This stock has regularly traded between 16 and 20-times forward earnings over the past 10 years.

Two bidders have emerged for chain manufacturer Renold (RNO:AIM) and the highest proposal amounts to a 48% bid premium. A quick look at Renold’s forward price to earnings ratio trend over the past 10 years (excluding the Covid sell-off) shows that its valuation has previous dropped to 4.5-times on multiple occasions before bouncing back. It reached 4.3-times in mid-April this year and that bargain basement valuation appears to have put the stock on the radar of hungry private equity buyers.

It’s not always about looking cheap near-term. British financial services business Alpha Group (ALPH) was trading on 30-times forward earnings when US payment group Corpay (CPAY:NYSE) disclosed bid interest in the group in May. That’s already a high earnings multiple before factoring in any bid premium.

In such situations, it’s common to see a bidder take a long-term view of a company and work out what the target is capable of earning well into the future. It uses those projections to calculate a fair value, not simply basing it off what the target might make in the next 12 months. That’s why identifying takeover targets is more complicated than simply running a screen for stocks trading on a low price to earnings ratio.

DOWNSIDES TO A TAKEOVER

I’ve long argued that takeovers aren’t necessarily good for investors who want to hold shares in a company for a long time and reap the rewards. Enjoying a 50% bid premium from a takeover is six to seven times the return you might expect in a year from a UK stock. However, a takeover denies you the benefit of future returns. If you hold a stock for 10 to 20 years and reinvest any dividends, you might make multiples of a 50% gain.

It depends on why you bought a stock in the first place. Certain people do thorough research and pick stocks they find to be attractive for assorted reasons, such as being in the right place to capitalise on a growth opportunity or simply be a solid, well-run business. I would categorise such stock buyers as an ‘investor’. In contrast, someone looking to play a stock for quick gains is more of a ‘day trader’ and they are the type of person who welcome takeovers because they can lock in any profit and move onto the next target.

GETTING SMALLER BY THE DAY

There is also the problem of the UK’s shrinking stock market. Takeovers of UK-listed companies outweighed IPOs (initial public offerings) three-to-one in the first three months of 2025.

Certain companies at the bottom end of AIM are voluntarily delisting because they cannot justify the listing costs. For example, aquaculture biotechnology group Benchmark (BMK:AIM) is delisting from both AIM and the Euronext Growth Oslo exchanges after deciding it is better off being a private company following the sale of its genetics business. It cited cost, management resource and regulatory burdens for the decision to delist.

We’ve also got a steady trickle of names shifting their primary listing to the US in search of higher valuations. Shareholders in construction equipment rental group Ashtead (AHT) have just voted in favour of making the US its main stock listing. That means it will soon no longer qualify for a place in the FTSE 100.

The government scrapping stamp duty on UK shares would be a good start to help drive more interest in the UK stock market. Currently, trading UK stocks is much more expensive than in other countries.

A flood of IPOs could also have a positive effect if they create a wealth of new and interesting opportunities for investors. Otherwise, we face a situation where shrinkage could continue and investors have less choice.

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