The trouble with UK PLC's

On Tuesday, Spirent, the 88-year-old British telecom’s testing group announced that it had agreed to a £1bn takeover offer from US technology specialist, Viavi Solutions. The deal, which will be funded by the US groups’ existing cash, an $800mn loan from Wells Fargo and a $400mn investment in Viavi by US private equity group Silver Lake, marks the latest in the ongoing trend of undervalued UK companies either being bought on the cheap by foreign suitors, or choosing to list outside the London market entirely.

What was supposed to be a ‘rebound’ year for the London Stock Exchange, has seen at least eight firms already signal their exodus to more promised lands.

Curry’s, a UK business dating back to 1884, recently rejected US hedge fund Elliot’s revised bid of £742mn, initially up from £700mn, on the grounds that the offer was still too low. Direct Line, another well-established British business, recently too rejected a £3bn bid from Belgian insurer Ageas, commenting that the offer was ‘highly opportunistic’, and ‘undervalued’ the firms’ future trading prospects.

More starkly last year, Cambridge-based Arm’s decision to snub London for New York’s Nasdaq was another moment of sobriety for the London market in terms of foreign exchanges offering more attractive valuations and economic opportunities for shareholders.

Through a combination of take private deals or delisting’s to other primary markets, a staggering 100 British companies left the London market in 2023, according to Quoted Companies Alliance.

According to the consensus of City analysts, the issue is not that the London market is short of newcomers, far from it, but that it is suffering from a chronic undervaluation problem. This has been expressed across the recent bidding landscape for Britain’s sub-£1bn PLC. Take for example the recent bidding over Wincanton, the UK’s last listed logistics firm based in Chippenham, which has received a bid offer of 605p per share from US-based GXO logistics, amounting to a 104% premium.

Wincanton is not an isolated case. Redwheel, Curry’s largest shareholder which recently backed the board in rejecting Elliot’s ‘undervalued’ offer – a 42% premium relative to current trading – commented that the UK equity market ‘no longer seemed capable of fulfilling its primary purpose of price discovery and efficient capital allocation’.

Another factor maintaining depressed valuations is the allocation of cash from large UK investment houses and asset managers towards almost saturated US equities, and away from UK equities, which are at a near all-time low.

For example, whilst global equity fund flows hit a three-year high at £2.26bn in February, this did little to positively affect the UK stock market. Commenting on investor aversion to UK PLC’s, Edward Glyn, head of global markets at Calastone remarked that ‘a rising tide is not lifting all boats’, and that ‘nothing could persuade UK investors to add capital to their home market.’

Yet, it’s not all doom and gloom. Official figures suggest that the UK remains the top investment destination after the US, attracting the second-most greenfield foreign direct investment in each of the three years to 2022, trumping even China (which has its own problems currently). Whether it be the ‘unlocking’ of pension scheme capital, or the creation of a British ISA, depressed valuations, systemic financial / geo-political issues and investor appetites will not be changed overnight.