Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Foreign takeovers of British companies have been surprisingly few given the fall in sterling since Britons voted to leave the European Union in June. The bids for chip-designer Arm Holdings Plc, broadcaster Sky Plc and pubs group Punch Taverns are the only post-referendum deals for U.K. firms worth more than $1 billion, according to Bloomberg data. Activity has been only slightly busier among large private companies.

It seems something more than sterling weakness will be needed to see swathes of U.K. Plc sold off to foreigners.

On The One Hand
Post-Brexit UK M&A deals over $1bn can be counted with fewer than five fingers
Source: Bloomberg
Note: Avnet's offer for Premier Farnell trumped a bid from Dätwyler made prior to the EU referendum

High share prices are providing a strong first defense. The market moved quickly to price in the benefits weaker sterling would give companies like Arm that derive a large portion of their revenue from outside the U.K. The FTSE-100, full of global businesses, has hit record highs. British listed firms with at least 75 percent of their revenue from overseas are up about 22 percent since the referendum. That cancels out the pound's 16 percent fall against the dollar in the same period.

Sure, a few international players have missed out on the rally. But some of these laggards, like Vodafone Group Plc, are a huge mouthful to a buyer, or would be politically tricky, like Rolls-Royce Holdings Plc. Others, like Cobham Plc and Inmarsat Plc, have a habit of inflicting profit warnings on their owners.

International Rescue
Not all stocks with sizeable non-sterling revenue have outperformed since Brexit
Source: Bloomberg
Note: Data covers companies that disclose 75% of revenue ex-UK or 67% or revenue ex-EMEA

Might bidders see value at the other end of the market in the many U.K.-focused firms exposed to discretionary consumer spending? These shares have fallen since the Brexit vote. After all, Sky is among them and it got a bid. But for every Sky there's a Next Plc. The retailer was down around 10 percent from June 23 before Wednesday's gloomy trading update extended the drop to nearer 27 percent. Potential bidders for cyclical U.K. stocks may prefer to wait and see.

What about the more defensive domestic stocks -- the so-called bond proxies? Could a British utility prove tempting to, say, an overseas infrastructure fund? Revenue may be in unloved sterling but at least it's reliable, and would become more valuable if the currency recovered. The snag is that the average forward price-earnings ratio of the big listed utilities is around 19 -- expensive for a low-growth sector. As U.S. bond yields rise, the attraction of these companies' reliable cashflow will diminish.

Home Alone
UK stocks with little domestic revenue have strongly outperformed since Brexit
Source: Bloomberg

You have to look hard to find tempting corners of the U.K. market. One possibility may be members of the FTSE All-Share Financial Services Index, which tracks financial firms that aren't banks. This has rallied in recent months, yet the price-earnings and price-to-book valuations have fallen slightly.

Cheap sterling was doubtless a factor in the timing of SoftBank's acquisition of Arm and Rupert Murdoch's recent bid for Sky. But both targets are trophy assets with particular strategic attractions to the buyers. As for Punch, Brits will always drink. 

While currency can be a catalyst, its powers don't extend to magicking up deals that wouldn't have happened anyway. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net