RUTH SUNDERLAND: The question for City institutions is: if private equity can recognise hidden treasure chests buried in UK plc, why can’t they?
- Stingy valuation placed on certain UK companies has left them prey to the private equity crocodiles
- A study argued that more than 200 listed firms are vulnerable, including ITV, Marks & Spencer, Sainsbury and Vodafone
- The current weird valuations are partly down to distortions from QE and low interest rates
No sensible or objective observer would wish Morrisons to fall into the hands of a US private equity predator.
But the swoop has provided a service of sorts by highlighting the bizarre valuations put on some of Britain’s best-known companies – and the consequences this is having.
Shareholders, including the largest investor Silchester, have quite rightly snubbed the bid by the Fortress consortium.
Cloudy skies: Stingy valuation placed on certain UK companies has left them prey to the private equity crocodiles
As they have recognised, the lowball offer reflects neither Morrisons’ growth potential nor its valuable assets, such as its freehold properties and integrated supply chain.
Their objections are based on price, rather than principled concerns over the perils of leveraged buyouts or the public interest.
But the stingy valuation placed on certain UK companies has left them prey to the private equity crocodiles.
A study by brokers Canaccord Genuity argued that more than 200 listed firms are vulnerable, including ITV, Marks & Spencer, Sainsbury and Vodafone. The latter is a fascinating case. Vodafone shares have fallen around 15 per cent since mid-March, when it span off its Vantage towers arm. Yet shares in Vantage, listed in Germany, have risen 15 per cent over the same period, which is interesting as Vodafone still owns just over 80 per cent.
There are also under-recognised assets within the Vodafone empire, service revenue is growing faster than expected, churn of customers is down and sales are robust in Germany, its biggest market. The view, however, is still downbeat.
Vodafone has a pile of debt and with a market value of £32billion would be a big bite for private equity. But the fact a company of this stature is even mentioned in the context of potential targets is an eye-widener.
Another odd case is NatWest. Under the leadership of Alison Rose, the spectre of Fred the Shred is almost banished and shares have nearly doubled in 12 months.
Yet the bank’s market value at £23.75billion remains below that of fintech upstart Revolut, whose most recent funding round put it on a price tag of £24billion. I know all the arguments about fintech being the future, but this seems absurd.
Revolut is in possession of a Lithuanian banking licence. It has not, so far, been in possession of a profit, still less paid a dividend. Its revenues of £222m last year were a fraction of NatWest’s £10.8billion.
Of course, NatWest has still not made a full recovery and there remains a hefty government stake. Even the bravest bidder would probably be wary of knocking at Alison Rose’s door. But the bank made a £1.6billion profit in the last three months and will return more than £3billion in dividends and buybacks in the next three years.
It has a big chunk of the business banking, current account and mortgage markets and is developing its own forex capability through the investment banking arm which could soon rival the fintechs.
The current weird valuations are partly down to distortions from QE and low interest rates. These have torpedoed the ability of traditional banks to make a turn, whilst raising investors’ tolerance of risk.
Fashion has played a part. ‘Value investing’, which focuses on the intrinsic worth of a business, has been out of vogue, with investors preferring to chase sometimes highly nebulous growth.
Factor in the tech craze and the disfavour in which UK stocks have languished post Brexit, and plenty of companies find their share price in the doldrums.
It makes easy meat for the vultures. And the question for City institutions is: if private equity can recognise hidden treasure chests buried in UK plc, why can’t they?