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As a turbulent 2022 draws to a close, British companies are fastening their seat belts as bankers and investors anticipate a surge in takeover activity because of the depressed pound and weak share valuations.

Overseas buyers haven’t exactly been flocking to the UK while its economic outlook remains depressed, but the combination of weak share prices and sterling could offset those concerns about growth.

Clothing retailer Superdry this week found itself the subject of a media report that its founder had held talks over a possible private-equity buyout. An investor in Wood Group, an oilfield services company, urged the company to buy back some of its own shares to avoid being a target.

Mid-cap companies aren’t taking any chances, according to Philip Noblet, head of UK investment banking at Jefferies, who said many of the bank’s approximately 90 mid-cap corporate UK broking clients believe they could be targets for takeover, regardless of what industry they operate in.

“The international nature of many UK FTSE 250 companies with their market leading positions, make them vulnerable at these valuation levels and we advise all boards to be very secure in the fundamental valuation of their companies and know where they might lose support or shareholders,” he said.

While the economic outlook may still put potential predators off an outright takeover, bolt-on acquisitions of subsidiaries of larger companies which have seen their market value shrink, might be more tempting, investment bankers and analysts said.

“Undoubtedly there are a lot of companies cropping up as potential takeover targets. The key problem for the UK is the risk that ... you could buy it now and it could be cheaper further into next year,” said IG chief market analyst Chris Beauchamp, picking out retailers and homebuilders as potential targets.

The domestically-focused FTSE 250 is down by almost a fifth this year while the internationally-focused blue-chip FTSE 100 is up 0.8% thanks to a drop in the pound.

The one-year forward price earnings (PE) ratio of the FTSE 350 stands at 10.9, just over a half of the benchmark US S&P 500 PE ratio of 17.8 and nearly 14 for Germany’s DAX, making UK stocks look relatively cheap.

“The valuation discount is so significant that M&A could land in a number of places,” said Clive Beagles, UK equity income fund manager at J O Hambro Capital. “In pretty much every sector US names trade at a big premium.”

Despite the sizeable valuation discount, the value of inbound M&A for British companies has declined in 2022 to its lowest in four years, according to data from Dealogic.

Year-to-date, 848 inbound transactions have completed with a value of around 99.45 billion euros ($104.74 billion), compared to 1,019 transactions in 2021 with a total value of 151.96 billion euros, according to Dealogic.

The pound, which hit record lows in late September, has shed 8.5% in value in 2022, largely as investors have sought out the safety of the US dollar given the uncertainty around war in Ukraine and surging energy prices.

“Overseas investors have a very significant currency advantage now,” said Scott McKenzie, fund manager at Amati Global Investors, “we expect to see a lot more takeover activity going into next year.”

Around 82% of the revenues for FTSE 100 companies come from overseas, while this figure drops to 57% for the mid-cap FTSE 250, according to index provider FTSE Russell.

A currency advantage alone does not necessarily kick-start deals though, according to Owain Evans, co-head of UK M&A for Goldman Sachs.—Reuters

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