RUTH SUNDERLAND: The question for city institutions is, if private equity can spot hidden treasure chests buried in UK plc, why couldn’t they?
- The miserly valuation of certain British companies has made them prey to the private equity crocodiles
- A study finds more than 200 publicly traded companies vulnerable, including ITV, Marks & Spencer, Sainsbury and Vodafone
- Current weird valuations are partly due to QE disruptions and low interest rates
No sane or objective observer would want Morrisons to fall into the hands of an American private equity predator.
But the dive has done a sort of service by highlighting the bizarre valuations of some of Britain’s best-known companies – and the consequences this has.
Shareholders, including largest investor Silchester, rightly rejected the Fortress consortium’s offer.
Cloudy skies: miserly valuation of certain UK companies has made them prey to private equity crocodiles
As they have acknowledged, the lowball offering reflects neither Morrisons’ growth potential nor its valuable assets, such as its owned properties and integrated supply chain.
Their objections are based on price, rather than principled concerns about the dangers of leveraged buyouts or the public interest.
But the stingy valuation of certain British companies has made them prey to the private equity crocodiles.
A survey by brokers Canaccord Genuity shows that more than 200 listed companies are vulnerable, including ITV, Marks & Spencer, Sainsbury and Vodafone. The latter is a fascinating case. Vodafone shares have fallen about 15 percent since mid-March, when it spanned the arm of the Vantage towers. Still, shares of Vantage, listed in Germany, are up 15 percent over the same period, which is interesting considering Vodafone still owns just over 80 percent.
There are also undervalued assets within the Vodafone empire, service revenues are growing faster than expected, customer churn is declining and sales are robust in Germany, the largest market. However, the view is still bleak.
Vodafone has a pile of debt and with a market value of £32 billion would be a big bite for private equity. But the fact that a company of this size is even mentioned in the context of potential targets is a broadening of the eye.
Another strange case is NatWest. Led by Alison Rose, the specter of Fred the Shred has been nearly banned and its shares have nearly doubled in 12 months.
Still, the bank’s market value at £23.75 billion remains lower than that of fintech upstart Revolut, whose most recent financing round put it at a price tag of £24 billion. I know all the arguments that fintech is the future, but this seems absurd.
Revolut holds a Lithuanian banking license. It has so far had no profit, let alone paid out a dividend. Last year’s £222 million turnover was a fraction of NatWest’s £10.8 billion.
Of course, NatWest has still not fully recovered and a hefty government stake remains. Even the bravest bidder would probably be wary of knocking on Alison Rose’s door. But the bank made a profit of £1.6bn in the past three months and will return more than £3bn in dividends and buybacks over the next three years.
It has a large share of the corporate banking, current account and mortgage lending market and is developing its own forex capabilities through the investment bank, which could soon rival the fintechs.
The current weird valuations are partly due to QE disruptions and low interest rates. These have torpedoed traditional banks’ ability to reverse, while increasing investor risk tolerance.
Fashion has played a part. Value investing, which focuses on a company’s intrinsic value, has gone out of fashion, with investors favoring sometimes very vague growth.
Bearing in mind the tech craze and discontent with which UK stocks languished after Brexit, many companies are finding their share price in the doldrums.
It easily makes meat for the vultures. And the question for city institutions is: if private equity can spot hidden treasure chests buried in UK plc, why couldn’t they?