UK firms have been subject to around £28 billion of mergers and acquisitions deals so far in 2021, the highest level since 2009 according to data from Dealogic. Investors are now trying to work out which UK stocks could be next.

Temporary power supplier Aggreko (AGK) surged 38% on 5 February after a consortium of private equity groups TDR Capital and I Squared Capital made a possible all-cash offer of 880p per share.

TDR was also behind a 305p per share proposal for specialist distressed debt manager Arrow Global (ARW), pushing the shares up 26% (8 Feb).

Increasing interest from private equity buyers shouldn’t be a surprise as collectively they have around $1.5 trillion of cash to invest, according to data provider Preqin.

In addition, UK shares have lagged other developed markets due to Brexit limbo over the last year, making them cheaper in relative terms. Asset manager Schroders says UK stocks have rarely been cheaper based on a price to sales multiple.

The pandemic has created a polarised market with the leisure, hospitality and travel sectors becoming casualties while the computer games and gambling sectors have seen a significant boost. Private equity and trade buyers are looking at both losers and winners of the pandemic as they seek to take advantage of strong trading or expect a bounce from the UK economy reopening.

Investors looking for potential targets might want to focus on companies with good asset backing and reliable cash flows, as well as undemanding valuations. Shares ran a screen on the market for such stocks and interestingly Aggreko made the original list.

Of the names on the list excluding Aggreko, UK food retailer J Sainsbury (SBRY) has good asset backing and reliable revenues. The company has been reducing its debts, leaving scope for a buyer to increase leverage should a takeover happen.

Home improvement retailer Kingfisher (KGF) has benefited from the pandemic as people spend more cash on their home which is likely to remain a key driver of growth. Foreign private equity buyers could view Kingfisher as a strategic entry into the UK.

Tool hire firm Speedy Hire (SDY) is also on the list and has been increasing market share.

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