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Many bid recipients this year are ‘nuts and bolts’ businesses which provide goods and services to other companies
Thursday 05 Aug 2021 Author: Ian Conway

There is a common theme in the current wave of takeovers involving UK stocks, namely that many of the targets operate in the business-to-business space and provide products or services to other companies.

Since the middle of July there have been more than half a dozen significant bids, most of which have been recommended by the boards of the target companies.

Parker-Hannifin’s bid for component maker Meggitt (MGGT) is a classic example. The offer is pitched at a generous 71% premium to the closing market value before the bid went public, thereby minimising the likelihood of shareholders rejecting it and of a rival bid arising.

Meggitt’s components are used in many different areas of aircraft and engine manufacturing, from cockpit instruments and engine parts to wheels, brakes and landing gear. Its products are complementary to those of Parker Hannifin, while its client base of airframe and engine producers is similar.

Likewise, Cobham’s bid for Ultra Electronics (ULE) is all about putting together two manufacturers of essential components with a similar client base in the aerospace and defence industries where both companies are trusted suppliers.

In the software sector, Sumo (SUMO:AIM) – subject to a bid by China’s Tencent – develops games for some of the most prestigious studios in the world. While it has its own intellectual property, most of what it does is end-to-end development for other companies.

Audioboom (BOOM:AIM), which is also in a bid situation, operates a platform for hosting, distributing and monetising hundreds of top tier podcasts.

In business services, Sanne Group (SNN) – which has just agreed a bid by Apex – and Equiniti (EQN) – which agreed a takeover by Siris Capital back in May – both provide essential corporate administration services to the financial sector.

Shares has built a stock screen which looks for qualities desired by private equity, to try and spot potential takeover targets. The screen uses the following criteria: an EV/EBITDA multiple of less than 10, EV/free cash flow multiple of less than 10, net debt/asset ratio of less than 50%, and a market value of more than £100 million.

If we focus on business-to-business firms in the screen’s results, the names which stand out are mostly involved in construction, infrastructure or logistics: DX Group (DX.), Keller (KLR), Mears (MER), Morgan Sindall (MGNS), Norcros (NXR), Renewi (RWI), Royal Mail (RMG) and Speedy Hire (SDY).

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