Get ready to see more flotations later this year, said David Schwimmer, chief executive of the London Stock Exchange Group on Thursday. Good: it would mark a change from the droughts of 2022 and 2023 that have caused much agonising over the health of the London stock market. But, actually, the deep problem here may not be a shortage of newcomers. Rather, it could be indifference, or so it seems, towards sub-£1bn UK companies that have been around for years.
The current extraordinary bid battle for Chippenham-based Wincanton, the last UK-listed logistics firm, shows how the London market – or part of it – sometimes doesn’t know how to value what it’s got.
A bid at a 52% premium to the previous share price would normally be regarded as juicy if it came at the end of a contested tussle, but Wincanton got that on one day when a French shipping firm, CMA CGM, offered 450p-a-share, or £567m, last month. Some Wincanton shareholders felt the offer was still too mean (well done, Aberforth), so the French went to 480p to try to clinch things. But now comes a fresh suitor from the US, GXO Logistics, offering 605p.
That is 104% more than the old share price of 297p, which shouldn’t happen if a market is liquid and full of active buyers and sellers. We’re not talking about a hard-to-value biotech outfit. Wincanton, with 20,000 employees, is in the business of warehouses and lorries.
Yes, there have been a couple of complications in recent years – the loss of a contract with HMRC to check cross-border goods and a deficit in the pension fund (now resolved) – but neither should have scrambled the market’s collective brain. Wincanton’s chairman, Sir Martin Read, understandably backed the original French offer on the grounds that the company’s strong financial performance had “not been reflected in the performance of its shares in recent years”.
If Wincanton was an isolated case, one could shrug and say pockets of undervaluation can occur in any market. But, over at Currys, the electrical retailer, a similar tale is unfolding. From a previous 47p, the bids from US hedge fund Elliott have reached 67p per share, an improvement of 42%, and the defending board is still resisting – quite rightly, many of us would argue (Peel Hunt’s analyst reckons 80p is the point at which Currys would be obliged to engage).
Currys’ largest shareholder, Redwheel, which has backed the board, made an excellent point when it said there was a wider problem with a UK equity market “which no longer seems to fulfil its primary purpose of price discovery and efficient capital allocation”. Fund manager Ian Lance pointed to the silliness of some big UK investment houses allocating cash away from UK equities, which are close to all-time low valuations, and towards US equities at close to all-time highs.
“Unless this changes, it seems likely that we will continue to see overseas corporate buyers step in to take advantage of the depressed valuations of UK equities with ownership falling into foreign hands and the number of quoted UK businesses will continue to decline,” he argued. It’s hard to disagree. A pitch for London is not compelling if it involves paying your advisers a small fortune to get listed and then being ignored for years until a foreign predator turns up.
In a rational world, perceived undervaluations would bring forth buyers and the problem would solve itself. Maybe the sight of a 100% takeover premium will help at the margin. But investor indifference towards pockets of small- and medium-sized companies is not new and none of the proposed remedies sounds transformational. Obliging UK pension funds to show more home bias in their equity portfolios would help, but compulsion has its limits. The proposal for a “British ISA”, with allocations only to UK-listed stocks, probably wouldn’t shift serious sums. Consolidation among defined-benefit schemes, to produce bigger funds with an appetite to own more UK equities, will not happen overnight.
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If Schwimmer has more radical ideas, we’d love to hear them. Sadly, he seems more interested in arguing that people such as himself – those running large FTSE 100 companies – should be paid more to compete with US rivals. That won’t cure the problems at the other end of the market.
