For many years, I’ve argued that UK shares are too cheap. Meanwhile, the FTSE 100 and FTSE 250 have pretty much gone nowhere for five years.
And while London stocks look cheap, both in geographical and historical terms, some FTSE 350 shares are deeply undervalued. Indeed, I suggested at end-2023 that this year might be big in terms of takeover approaches for unloved British businesses.
Yet another bid
My guess was that there would be five to 10 takeover bids for big London-listed companies in 2024.
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As luck would have it, news of one broke on Saturday (17 February). The latest company to enter the sights of well-financed bidders is high-street electronic chain Currys (LSE: CURY).
Founded in in August 2014, Currys brought together two famous retail brands: Dixons Retail and Carphone Warehouse. Today, the group has 815 retail outlets across eight countries, after closing all 531 UK Carphone Warehouse stores during the Covid-19 pandemic.
Alas, shareholders in Currys have had a tough time for years. As I write, the share price has dived 37.1% over one year and crashed by almost two-thirds (63.7%) over five years.
What’s more, on 23 April 2021, the Currys share price closed at 156.2p, near to its five-year high. On Friday (16 February), the stock finished at 47.08p. This values the group at £536.6m — a fraction of former highs.
And just like in the world of nature, it’s when companies are weak and share prices have slumped that predators pounce. Currys has received an unsolicited offer from Elliott Management, a leading US activist investor, hedge fund and private-equity firm.
On Saturday afternoon, Currys’ board announced that it had on Friday unanimously rejected a cash bid priced at 62p a share. This is nearly a third (+31.7%) higher than that day’s closing price, valuing the chain at just over £700m.
Let the dance begin
This means that the mergers and acquisitions (M&A) dance has begun for yet another undervalued UK-listed company.
Typically, this dance begins by the target’s board rejecting the initial approach, arguing that this first bid “significantly undervalues” the business. Currys obliged by saying exactly this on Saturday, after Elliott earlier admitted it was considering a cash offer for the group.
What often happens next is that the potential acquirer comes back with a second, improved offer. Typically, this tends to be 10% to 20% higher than the first offer. Frequently, a third, higher price is unveiled, at which point many M&A dances end with a successful buyout.
Of course, there’s no certainty that Elliott will indeed make a formal offer for Currys. Instead, it may choose to walk away if the numbers don’t stack up at a higher price. Nevertheless, under UK takeover regulations, it has until 16 March to make a firm offer or walk away.
When the stock market opens on Monday morning, I expect the Currys share price to leap to a level approaching the 62p-a-share offer. This discount will balance the likelihood of the deal going ahead with the probability of a higher bid emerging.
This backs my long-held feeling that far too many UK-listed businesses are wildly undervalued. Also, I hope even more value will be unlocked in this manner for long-suffering shareholders in 2024-25!
