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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There goes another one. KKR’s £4.7bn purchase this week of Spectris, a high-tech equipment maker, is only the latest in a series of buyouts of UK mid-market companies. Lowly valuations are attracting bargain hunters. But investors wishing to take a punt on the next target will need to pick very carefully.
KKR’s bid, at a hefty 96 per cent premium, pipped that of rival private equity rival Advent International to take out the fifth-largest group in the FTSE 250 and the index’s fourth best performer this year. Other deals preceded it. In May, Deliveroo succumbed to a £2.9bn bid from US food delivery peer DoorDash while shortly before, convenience food producer Bakkavor agreed to a takeover by local rival Greencore, for £1.2bn. In January car parts group Dowlais accepted a £1.2bn offer from US peer American Axle. UK investment bank and FTSE 250 expert Peel Hunt this week hinted at more to come, saying it had a strong pipeline of deals, both announced and at an earlier stage.
So should investors go all in on a FTSE 250 tracker and skip the hard work of guessing the next target? That is tricky for mid-cap gauges, which by their nature tend to contain a mix of companies on the slide as well as the next group of buyout shop targets and world-beaters.
Some back-of-the-spreadsheet sums can narrow candidates, however. For simplicity, strip out closed-end investment funds and real estate investment trusts to focus on operating companies. Next, take out those with sales falling by at least 3 per cent in the past year given that suggests potential fundamental problems with the business. Investors may disagree with this, or want a higher hurdle, as those then removed include both Dowlais and Spectris.
Still, filter for leverage too: heavily indebted groups are less appealing. Cutting those with, say, net debt of more than 2.5 times ebitda reduces the candidates to less than 90, including Deliveroo and Bakkavor. Of that group, only a third are trading at price relative to earnings at or below the index multiple of 11, suggesting they are indeed cheap. The most pricey meanwhile — online reviewer Trustpilot and circuit maker and 2024 hot IPO Raspberry Pi at a punchy 71 and 35 times next years’ earnings respectively — would make it hard for a buyer to offer a substantial premium but that is not always a bar to high-price tech deals. Names in the middle of the list as ranked by price multiples include Pets at Home and IT hardware specialist Computacenter, on 13 times each.
Jitters about the UK economy have weighed down on the FTSE 250 more than the more internationally focused FTSE 100. That has left the junior index trading well below its pre-pandemic average of about 15 times forward earnings. It is easy enough to see the potential for bargain hunting, but investors need to do some work to sort the deals from the duds.
