AlixPartners has identified 40 listed companies (FTSE 100 and FTSE 250) with market values far lower than their underlying asset value. This looks set to trigger a potential stand-off between private equity, awash with cash to invest, and activists looking to address issues of poor performance and seeking to maximise their investment.
Difficult market conditions, underpinned by the political and economic uncertainty of Brexit and concerns about global trade conditions, are depressing equity markets. This is devaluing listed businesses even if their revenue comes from overseas, driving an increase in the move to private ownership. Last year 28 companies went into private ownership and only 34 applied to list (the lowest number since 2009). Only £3.7 billion was raised in listings; half the value realised in 2018.
Add to this weak Sterling and private equity firms sitting on $1.5 trillion of capital (and looking to raise more), accommodating debt markets and plentiful supplies of cheap, covenant-light credit, these businesses are facing something of a ‘perfect storm’ of vulnerability.
Last year, 28 companies went into private ownership and only 34 applied to list (the lowest number since 2009).
AlixPartners has observed that most of these companies have also been subject to accelerating headwinds and disruptive influences in one or more of their business units. In every case, the scale of transformation required to address these has seemed overwhelming, leading to [repeated] profit warnings and share price reductions. This has damaged investor confidence in both the business and its ability to change.
Shackled by the risk aversion of institutional owners, management in these businesses consistently struggle to address issues such as core vs non-core activities, preferring instead to look for cost synergies through mergers. With strategic buyers’ decision-making inhibited by political and economic uncertainty and complex antitrust regulation potentially upending larger deals, the stage is set for funds to capitalise.
Private ownership naturally allows for a longer-term, and more drastic, transformation. Free from the need to justify to/appease diverse shareholder groups, private equity firms can focus on selling non-core businesses to other investors or more strategic buyers. They can also remove or significantly reduce the substantial corporate overheads often associated listed businesses.
This population of the FTSE, and their attraction to private equity, is likely to grow as their appeal to PE funds remains – in the short to medium term at least. The pace of growth will also be driven by funds joining forces with one another, often supported by pension and sovereign wealth funds, to execute bigger and more complex deals.
AlixPartners, therefore, anticipates the number of public-to-private deals will increase. This, in turn, is likely to be countered with challenges from activists, forcing a shareholder value optimization contest.
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