ONE day, there won’t be any decent London-listed companies left for private equity funds to buy.
The latest attempt at a UK leveraged buyout may be remarkable for its size, but it otherwise conforms to a familiar pattern that’s seeing the market gradually liquidated by cash bids from buyout firms and foreign bidders.
Intertek Group Plc on Wednesday said it was minded to accept a proposal from EQT AB valuing it at £10.6bil (US$14.3bil) including net debt.
Intertek is a classic UK target. The FTSE 100 company tests goods for compliance with regulatory standards – an attractive niche with durable demand.
It also has little to do with the struggling British economy, with the overwhelming majority of sales coming from overseas.
The one thing that is British is its lowly valuation.
When the Swedish buyout firm first approached, Intertek stock was trading at earnings multiples last seen around 2010 and well below those of US peer UL Solutions Inc.
Similar characteristics are found across other recent UK “take-privates,” whether it be Advent International’s agreement to buy aerospace contractor Cobham Ltd in 2019, TDR Capital’s purchase of portable power generator Aggreko Plc in 2021, EQT’s deal for veterinary specialist Dechra Pharmaceuticals Ltd in 2023 or KKR & Co’s acquisition of engineer Spectris Ltd last year.
Familiar pattern
Defending UK firms against such bids has become formulaic.
The bidder dangles a tentative offer at a conventional 30% to 40% premium.
The board rejects the overture because the company’s starting market value is low and the mooted price falls short of its fundamental worth.
Then comes a slightly higher offer and another rejection. The back and forth continues, invariably shifting to the public domain.
The board knows the buyout firm needs any deal to be friendly.
The premium may move above 50%, in some cases even 100%.
It usually ends when leading shareholders start agitating for the board to cave in. Rarely does the target see off the bidder.
This week brought a third raise for Intertek to £61.08-a-share including a forthcoming dividend.
That was a 62% premium over Intertek’s share price just before EQT made its first discreet approach, and around 40% over where the shares were just before takeover interest became public.
The offer effectively delivers shareholders most of the value of Intertek’s own strategy to break itself up, without the wait or the risk of things going wrong.
Analysts at UBS Group AG put that at £60 a share, those at Barclays Plc and Rothschild & Co Redburn reckoned north of £70 a share.
Many shareholders wanted a deal, the board was right to accept. Yet again, it has taken private equity to deliver a fair valuation the UK market wouldn’t ascribe.
Intertek’s falling valuation was an invitation to a bid
The stock price’s ratio to earnings was near financial crisis levels. The question all buyout targets should ask is whether private equity can do anything the company can’t do by itself (apart from financial engineering).
The obvious options for a buyout bidder are to invest in the business to pep up growth and then sell or relist parts of it, or later list the whole company in New York if it has significant US revenue.
Aggreko, bought for £2.6bil five years ago, is being prepared for a US initial public offering (IPO) at a possible US$15bil valuation, Bloomberg News reported in March.
When EQT approached, Intertek was already in the advanced stages of planning to sell or spin off half of its empire.
The remaining business would have been an obvious candidate for a listing in the United States, where it might secure a valuation closer to UL’s.
Analysts at Royal Bank of Canada said that option was potentially the key consideration in setting the deal price.
Sure, EQT has its work cut out.
The likely need to invest in Intertek suggests it might be hard to fund much more than half the purchase price with debt, limiting the scope for leverage to boost returns from growing the company’s overall value.
Assuming a roughly £5bil to £6bil equity check, EQT would probably have to sell the constituent businesses at a collective earnings multiple higher than it’s paying here if it’s to double its money in line with clients’ expectations.
The root causes of all this are well understood. UK pension plans have systematically withdrawn from their home equity market, leaving UK companies bereft of engaged ownership.
The FTSE 250 mid-cap index and bottom end of the blue-chip FTSE 100 offer digestible targets.
With each listing that leaves via a cash bid, the overall quality of the market that remains suffers unless a promising IPO arrives to refill the bath.
Intertek was doing the right thing. It was already thinking like private equity. But that came too late.
The lesson for other London targets is clear. If you are sitting on big strategic options that could boost your share price, don’t wait for a bid to come along before you announce them. — Bloomberg
Chris Hughes is a Bloomberg Opinion columnist covering deals. The views expressed here are the writer’s own.