Private equity’s rush to buy up UK companies

by Jonathan Adams
Private equity

According to Refinitiv, there have been 401 private equity deals so far this year in the UK worth more than $49.8bn

2021 is a record breaking year for private equity deals in the UK, as ‘corporate raiders’ target cheap British companies on the stock market.

Low interest rates have created a favourable environment for private equity, which typically relies on borrowing to fund its deals. The global buyout industry has raised a record $1.6tn (£1.15tn) to spend, according to data from Preqin. Funds are now under pressure to spend that cash.

The UK is an attractive place for private equity. Brexit and the FTSE’s over reliance on ‘dull’ industrial and heavy industry stocks has largely put off international investors in recent years. As a result, many UK listed companies look cheap compared with international competitors.

The FTSE 100 is the worst performing major equity index since the UK Brexit vote in June 2016, says Russ Mould, investment director at AJ Bell. Unpopular equals unloved and unloved equals potentially undervalued.

There have been 401 private equity deals so far this year in the UK worth more than $49.8bn, according to data from Refinitiv. That’s the highest number in the first half of a year since data began being collected in 1996. The second highest was in 2018, when 297 companies went private.

British companies that have fallen to private equity include: supermarket Asda; mechanics AA; infrastructure firm John Laing; St Modwen Properties; fund administrators Sanne Equiniti; private jet firm Signature Aviation; insurer LV; aerospace company Senior; and pan-Asian takeaway chain Itsu.

The most recent UK deal is the ongoing battle for grocery chain Morrisons. A consortium led by Fortress Investment Group in advanced talks to buy the business and on Friday upped its offer to £6.7bn ($9.3bn). Apollo, a fellow buyout firm, is considering joining the takeover. A rival US firm Clayton, Dubilier & Rice is reportedly mulling a counter-bid.

Darren Jones, chair of the House of Commons Business, Energy and Industrial Strategy Committee, worries about potential job losses and pension fund shortfalls at Morrisons. He raised concerns about the high levels of debt used to fund these types of takeovers in a letter to the Competition and Markets Authority.

Data from Refinitiv shows that private equity deals typically involve debt worth around six times a company’s earnings. That’s much higher than typical debt levels for listed companies. Huge debt piles leave firms more vulnerable to changing economic winds.

Our main concerns are about job security, while maintaining and improving our members’ terms and conditions of employment, said Joanne McGuinness, Union of Shop, Distributive and Allied Workers national officer.

McGuinness said his union had a constructive working relationship with Morrisons’ bidders but was seeking greater engagement and further assurances for staff on the future of the business.

Andrew Koch, a senior fund manager at Legal & General Investment Management, a top 10 Morrisons shareholder, said last month bidders appeared to be interested in Morrisons for the “wrong reasons”.

If an acquirer makes strong returns this should come from making the company a better business, Koch said last month. It should not come from buying its property portfolio too cheaply, levering the company up with debt, and potentially reducing the tax paid to the exchequer.

Analysts at Bernstein said they “struggle to see” how assets wouldn’t be stripped at Morrisons if the deal price was raised. Assets that could be sold off could include petrol stations, factories, warehouses and stores.

The Morrisons bidders have tried to put shareholders’ concerns at rest, saying the supermarket’s large real estate portfolio — part of what makes it an attractive target — wouldn’t be put on the line. But that promise is not legally binding.



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