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Talk about a happy Halloween. The FTSE 100 saw out a jittery October with a bang on Monday, notching up its biggest one-day jump since April 2003 – 2% – amid a flurry of takeover activity not seen since the dotcom boom.
Four British firms with a combined market capitalisation of more than £23bn, nearly 2% of the FTSE 100’s value, received takeover approaches. Spain’s biggest telephone firm, Telefonica, agreed to pay almost £18bn for O2, while glassmaker Pilkington received an approach of around £2bn from Japan’s Nippon Sheet Glass. Ports company P&O is being eyed up by DP World, a Dubai ports operator, and building firm Mowlem said it had received a preliminary approach.
It seems that UK plc is up for sale. Since January, 512 deals targeting UK firms worth $120bn have been announced, the highest figure for January to October since 2000. One reason for the mounting interest in UK companies this year is that the British market, as Paul Gibbs of JP Morgan points out, “is the most open in the worldÉ so everything is available at the right price”. The FTSE looks reasonably valued, and companies have rebuilt their balance sheets since the 1990s and are enjoying strong profit growth. And as the eurozone economy remains lacklustre, many European firms are targeting “assets in good shape elsewhere”, says Henk Potts of Barclays Stockbrokers.
But the key to mergers and acquisitions (M&A) activity across the world has been low interest rates, says Edward Hadas on Breakingviews.com. That makes borrowing to finance acquisitions cheap and boosts the appeal of equities over bonds. For instance, it made more sense for DP World’s owner to buy P&O, on a p/e of 27, than stick its petrodollars in ten-year US Treasuries offering an inflation-adjusted yield of –0.1%. Can the M&A boom endure? Takeover exuberance still looks largely rational, says the Frankfurter Allgemeine Zeitung, with scant sign of firms dashing for growth beyond their core businesses, usually a harbinger of value destruction.
Moreover, the average premium paid in UK takeovers is currently 17% - in 2000 it was 29%. The main risk is inflation, as Hadas points out. Recent weakness in the bond markets may signal trouble ahead, and central banks are set to raise rates if inflationary pressure shows signs of spreading, which would imply a cooling M&A market. Deal-makers “should enjoy the party while it lasts”.
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Andrew Van Sickle
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