In my last blog I highlighted that a big effect of the pound’s weakness post Brexit is to make those UK-listed companies that may have previously appeared attractive to overseas buyers, look even better value. Whilst sterling has recovered a little from its post-Brexit lows, it is still 11% lower versus the US dollar and 14% lower versus the Japanese yen since the day of the referendum.
One early bid has been Softbank’s approach for smartphone chip manufacturer ARM Holdings, which was opportunistic in so far as it took advantage of an exchange rate that had moved 40% plus in its favour over the previous year, neatly matching and offsetting the 40% premium the Japanese tech firm offered for the stock. We fully expect further deals such as this.
As the chart shows, there were significant spikes in foreign purchases of UK companies following previous sterling devaluations – the pound’s exit from the ERM in late 1992 and the 25% fall in sterling in 2008/09 around the financial crisis. In both cases, within six months there had been a sharp rise in acquisitions and this persisted as the currency stayed weak.
In a list of companies that we would regard as particularly vulnerable to opportunistic predatory interest, we would include ITV, AstraZeneca and some second tier aerospace and defence stocks.
ITV was knocked hard post the vote, having already fallen sharply in the weeks leading up to 23 June, as advertising revenue softened reflecting heightened client uncertainty. The broadcaster has recovered from its lows, but remains 7% below its pre-Brexit level. For the likes of c.10% shareholder Liberty Global, a combined 17% decline in US dollar terms represents a useful discount on the price just a few weeks back.
In contrast to ITV, AstraZeneca has performed well since the Brexit vote, reflecting in part the currency benefit to forecast earnings from a weak pound. The shares have risen an impressive 23% since 24 June, but this figure is still below the 26% decline in the value of the UK currency versus the dollar since Pfizer launched their first formal bid in January 2014. Other UK healthcare companies have also been subject to bid speculation, such as Smith & Nephew in 2014 (which did not proceed).
Another area of the UK market that looks vulnerable to currency-advantaged overseas M&A interest would be some of the second tier aerospace and defence companies such as Cobham and Senior Engineering. These stocks have struggled over recent years as their markets have come under pressure. Whilst earnings forecasts are probably still vulnerable to further near-term downgrades, we are close to an inflection point on the commercial aerospace side, as the industry moves from declining old aircraft to a ramp-up in new platforms, and on the defence side from a broad reversal in years of declining government defence budgets. Factor in the currency benefit and these stocks are left looking vulnerable to consolidation by larger US peers.
Whether international businesses are willing to take on the uncertainty surrounding the European Referendum is slightly trickier to gauge. However, the sharp currency moves have made the decision considerably easier to sanction at board level. Unfortunately, the UK equity market has lost some of its best companies over the years to opportune corporate action. I would urge the boards of world-leading UK firms not to sell themselves or their shareholders short.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.