Derek Pain: Prepare for a foreign bid bonanza as taste for takeover returns
No Pain, No Gain
Saturday 26 February 2011
According to those who believe they are in the know, a deluge of takeover action is likely to engulf the stock market this year. Many of the bids, they opine, will come from overseas. The view seems to be that there is plenty of cash around which can be supplemented by piling up debt and share issues.
So are we due for a rush of pre-banking crisis proportions? There is no doubt that since the world teetered on the brink of financial disaster, the level of takeover wheeling and dealing has been dramatically curtailed. Many City acquisition specialists have twiddled their thumbs or – unfortunately – joined the redundancy crowd. With activity so low it would not require much of an upsurge to transform what in the past few years has been something of a quiet City backwater. But it seems expectations are running much higher than a mere modest takeover uplift. Providing there is no obstruction from world events we are heading, I hear, for a bid bonanza.
If the takeover enthusiasts are right, there will almost certainly be suggestions that essential and iconic UK interests should be protected. Many countries around the world guard certain aspects of their commercial life fiercely from foreign predators. The French are past masters at such manoeuvres. In this country cash is king. The most recent outcry centred on the US takeover of confectioner the Cadbury, hardly a vital element of the domestic infrastructure but a long-established institution with a proud name and slightly unworldly origins. Many felt it should remain British. But the unsentimental, mercenary influence of hedge funds helped to seal Cadbury's fate. UK investors, seemingly opposed to the Americans, had little say in the proceedings.
Cadbury, however, was merely the latest in a long procession of victims. The motor-making side of Rolls-Royce, the P&O shipping group and Heathrow are under foreign ownership. So are most of our top brewers and many utilities. Even ICI, once the bellwether of British industry, is now Dutch owned. Until 2002 it was possible for the Government to block a bid on public interest grounds. The was rarely invoked and unceremoniously dropped. Except on monopoly considerations its been a free-for-all since then.
Its not all one-way traffic. UK companies, like the old British Empire, have stretched far overseas, although last year foreign invaders splashed out more than twice as much in this country than their UK counterparts spent on foreign assets. There is much to be said for globalisation but, as Cadbury illustrated, the sweet taste of a bid can be an illusion for many workers. And in financially difficult times the temptation for a company to be more tolerant towards its domestic market must be a factor when it comes to alleged efficiencies, such as factory closures. And invaders do not always fully understand pastures new. For example, many British companies have suffered acute embarrassment in the world's biggest market, the US.
Last year the City's Takeover Panel introduced new rules aimed at restricting overseas predators. Most observers feel they will make little difference and the foreign march will continue unabated. Which companies are likely to receive corporate strikes? The list of possible victims is long with even BP, until the Gulf of Mexico oil spill seen as invincible, regarded as a possible candidate. With 40 per cent of the oil behemoth's capital held in the US, nationalism would not be a serious factor. Other big groups in the firing line include Smith & Nephew, Centrica and Invensys. Among smaller groups, I wonder if former No Pain, No Gain portfolio constituent Avon Rubber is on American radar.
The portfolio has witnessed modest takeover action since the departure of brewer Scottish & Newcastle, swallowed in 2008 after a Continental bid. Indeed what activity has occurred has been represented by modest excursions by some constituents. Rivington Street Holdings, by far the portfolio's most persistent bidder, has made an exuberant start to 2011. It has put through two deals, absorbing a software business and an events arranger. I anticipate more expansion. On the trading front, its chairman Jim Mellon has said revenue in the first four months was "materially ahead" of last year's corresponding performance.
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