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A stock market index of small British companies could be wiped out within four years by a takeover that ‘fuels a frenzy’, City analysts warn.
In a report that raised new concerns about London’s health as a financial centre, Peel Hunt said the FTSE Small Cap will cease to exist in 2028 if the ‘relentless’ pace of merger and acquisition (M&A) activity continues.
The index – which consists of companies in the UK main market that are not large enough to be part of the FTSE 100 or FTSE 250 – has seen its numbers fall from 160 in 2018 to 114 last year.
“If we extrapolate the current trendline, the last company will leave the FTSE Small Cap in 2028,” the report said.
Peel Hunt noted that in the first three months of this year alone, 12 acquisitions of London-listed companies worth more than £100 million were announced.
Takeover threat: Peel Hunt said the FTSE Small Cap will cease to exist within four years if the ‘relentless’ pace of merger and acquisition activity continues
The proposed deals include a £5.7 billion bid for packaging group DS Smith, Nationwide’s £2.9 billion takeover of Virgin Money, Barratt Developments’ £2.5 billion takeover of Redrow, and the £762 million purchase of carrier Wincanton by an American rival.
Other approaches to British companies have been rejected, including foreign attempts to buy Currys and Direct Line.
A sharp fall in the number of companies wanting to list their shares in Britain means the shares bought are not being replaced.
And some London-listed companies are jumping ship without a takeover, including CRH and Ferguson, which have moved their shares to New York, and Tui, which has opted for Frankfurt.
Paddy Power owner Flutter will move its primary listing to New York next month.
With a shortage of companies entering the stock market through initial public offerings (IPOs) – such as the high-profile snub of Cambridge-based chip designer Arm going public in New York – numbers are dwindling.
Warning that Britain is ‘not replenishing supplies’, Peel Hunt head of research Charles Hall said: ‘There has been minimal IPO activity over the past two years.
‘This needs to be actively addressed as the FTSE Small Cap will cease to exist by 2028 at the current run rate.
‘The pace of de-equitisation is relentless and will inevitably continue given the low valuation placed on UK companies.’
He said that ‘the impact of the scale of de-equitization is visible in the FTSE Small Cap sector’, unlike the FTSE 100 or FTSE 250, as these always contain the 350 largest London-listed companies.
While the number of small cap companies has fallen, the total value of its constituents has also fallen from almost £60 billion in 2018 to around £30 billion today.