UK IPO Drought 'Could End in 2025' – Equity Manager Anderson

In part two of our video interview with Guy Anderson, talk turns to who is going to list next, and, more importantly, when

Christopher Johnson 18 September, 2024 | 9:16AM
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Christopher Johnson: Returning to the UK equity market, should investors be concerned about the rate and pace of takeovers that we're seeing in mergers and acquisitions? What do you think about that?

Guy Anderson: Sure. It's definitely a double-edged sword, isn't it? Because on the one hand, few people would object to coming in the morning and reading that they've received a takeover bid at a 30% premium for whichever company in the portfolio. But at the same time, it potentially shines a light on the drastic undervaluation of the UK market because so many other buyers are looking to buy these assets because they think they're buying them at a good price. And we've certainly seen this year a significant pickup in M&A activity. So, some numbers that I was looking at said that the total incoming M&A into the UK this year was running at, I think it was $56 billion year-to-date across, I think it was 31 transactions and that played against $25 billion for the entirety of 2023. So already we're up 125% versus last year. So, a big pickup.

So, you get the takeover premium today, but you have to be concerned about is this fair value for the share that we're being offered? And then also, does it have negative consequences in terms of gradual de-equitization in the UK market? And so, the area that I care most deeply about actually across all of this is that the UK stays a healthy and attractive equity market. And of course, for that to continue to be the case and for it to be a vibrant market, I'm really interested in what new companies are going to come to market. And we spend quite a lot of time meeting companies that are planning to IPO in the UK. And of course, there's been pretty limited activity through this year. But certainly, we're hopeful that things are going to pick up on that front next year, which would be great to see.

CJ: And what are they telling you about why they want to list in the UK? Is the environment kind of set up for them to now want to be part of the UK equity market?

GA: Yes. So, I think the UK – it's very easy to be down on the UK. But you've got to remember – I think it's really important to remember the U.K. still remains open for business. We are still one of the easiest, if not the easiest, geography in which to do business. So, it is a business-friendly environment. And the new government have made it clear that they plan to stay business friendly. Yes, of course, there will be changes, but in aggregate, plan to stay business friendly. And the UK is still – this is the largest market in Europe. It's very easy to forget that. But this is still a really important financial center. So, it makes sense for many businesses across a number of different sectors to consider the UK as their home for a listing. 

CJ: And my final question to you is, which sector within the UK are you most excited about?

GA: So, of course, it's based on the individual stocks, as I've said. But the sector that we have the biggest overweight to in the portfolio, which I think is important because you've got to judge people by their actions rather than what they say, is the consumer discretionary space. Specifically, within that, our largest sub-sector overweights are media and housebuilders.

So maybe on the housebuilders, potentially that's interesting because that is a sector that has been through a pretty torrid time. If we think back over the last couple of years, with combination of increasing mortgage rates really dampening the level of demand for housing or consumers' ability to buy houses, and also a period of significant cost inflation.

Where we're sitting today? Mortgage rates have clearly peaked. They've come down off the highs. So, we're seeing greater demand from potential house buyers. And then at the same time, the housebuilders are looking to expand their volumes and start to build more houses so that they can meet this future demand. And that's all against a broader landscape where the new government has this target in place to build 1.5 million homes over this five-year period, which would imply a significant step up in housebuilding activity.

In order for that to be a reality, one of the key constraints to housebuilding, which has been the planning process. The government is obviously looking to unlock some of that, and that could really help a number of housebuilders accelerate the volume of houses that they build, and therefore, of course, their profits.

CJ: And why media?

GA: So, within media, I guess that talks a little bit to the stock-specific nature of the portfolio, because actually that's driven by two specific holdings. One, Bloomsbury, which is the publishing business, which is doing very well at the moment, in particular, Sarah J. Maas, the author, who's having a phenomenal run of success, and the publisher is benefiting off the back of that, as well as, of course, from the Harry Potter franchise and a multitude of other authors. And then 4imprint, another reasonably long-standing holding in the portfolio, but that is a company that sells branded promotional materials used by corporates, mostly in the U.S. And that's a business that has really stepped up through the pandemic and post the pandemic in terms of gaining market share, spending their own marketing dollars more efficiently, and so improving their profitability, and it's a business that's continuing to go from strength to strength.

CJ: Guy, thank you so much for joining me in the studio.

GA: Thank you. Thanks, Chris.

CJ: This is Christopher Johnson from Morningstar UK.

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Christopher Johnson  is data journalist at Morningstar

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