This year has seen quite the flurry of foreign companies making bids for listed UK companies. UK shares, it seems, have been catching a lot of professional investors’ eyes, from Zurich to Frankfurt, New York to Hong Kong.
What’s going on – and what might it mean for a small investor?
Deep value hunters
To illustrate, let me zoom in on one business area: flavourings. When you drink a chai latte, fruit and protein shake or premixed margarita often you will be imbibing ingredients made by the global flavouring industry.
Earlier this year, London-listed Treatt agreed to a takeover by a German rival that had built a large stake in it. That followed an unsuccessful lowball bid last year that was rejected by shareholders (including me).
More recently, the board of Tate & Lyle (LSE: TATE) has agreed to a takeover approach by larger US rival Ingredion.
The logic for these deals is simple. Flavouring profitability has been impacted globally by inflation and the industry is consolidating, with large players seeing to build already greater economies of scale.
Last year saw Tate & Lyle’s revenues rise – indeed, they topped £2bn. But net profit fell by almost a third, to less than £100m. That means the long-established firm delivered a net profit margin below 5%.
Firms like Ingredion have been hunting for value – and reckon they have found it among some the shares of some UK rivals.
Looking for bargains in the London stock market
Ingredion’s proposed price per Tate & Lyle share is £5.95, as well as specified dividends it may pay while it is still an independent listed company (the merger is not expected to be complete until next year).
That is a 56% premium to the price last month before Ingredion expressed its potential interest in buying the firm. It is 63% above the price at the point last October when my colleague Stephen Wright asked, “at a 15-year low, are Tate & Lyle shares a screaming buy?“
It is even 7% higher than the current share price (even ignoring the dividends). That reflects the risk that the long timeline could yet mean the deal falls through for some reason despite already being agreed. It also reflects the opportunity cost to investors of tying their money up in the share.
That sounds like great news for shareholders – and for those that bought early last month, it is. But just as Treatt’s takeover price was far below the share’s previous high, Ingredion’s offer values Tate & Lyle shares 30% below where they stood less than two years ago.
Takeover bids can be good for some shareholders, but bad for others
Trade buyers can wring value out of a purchase that may not be open to purely financial investors.That explains why they may be willing to pay more than the market suggests is the going price for some UK shares.
Once takeovers are agreed by the requisite percentage of shareholders, shareholders effectively have no choice but to accept them.
For long-term shareholders that can mean receiving much less for their shares than they originally paid for them. That can be painful.
But it also highlights the reality that, in multiple sectors, some British shares continue to look real bargains. I am hunting for more to add to my portfolio!
Should you invest £5,000 in Tate & Lyle Plc right now?
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Christopher Ruane owns shares in Tate & Lyle.
