Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Access both platforms from your single Saxo account.
UK plc on sale: Could these 5 stocks be the next takeover targets?
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Could these 5 UK stocks be the next takeover targets?
Key Points
- Foreign takeovers of UK companies increases fourfold
- Investors look to where the next big deals are coming from
- Momentum, valuation and strategy all play a part
Unloved and undervalued, the UK market has been a happy hunting ground for many a foreign predator in recent years, be they megacap multinational or private equity firm. The reasons for Britain’s equity market offering such rich pickings are manifold – from a structurally weaker sterling since the Brexit vote to a massive relative valuation gap over the last decade; to domestic policies that have push pension funds substantially into gilts at the expense of equities.
Now the trend is continuing, with the latest data showing the provisional values of both inward and outward mergers and acquisitions (M&A) were at their highest since late 2022, driven by some very large deals. According to the Office of National Statistics, inward M&A (foreign companies acquiring UK companies) hit £19.2 billion in the first quarter, almost four times as much as we saw in the last quarter of 2024.
Notable Takeovers
The period was marked by fewer but larger deals, indicating buyers are searching out bigger, potentially higher-quality names as an uncertain macroeconomic backdrop is driving some management teams to seek shelter in scale.
The £5.8bn takeover of DS Smith by International Paper Company of the US and Carlsberg’s £3.3bn buyout of drinks business Britvic were among the largest completed last quarter.
Sometimes acquirers are seeking entry into a new market (the UK), sometimes it’s because private equity firms are looking for better returns on their cash and are happy to buy then break up a company believed to be undervalued vs the sum of its parts. But we can also look to some companies that get jumped on due to depressed share prices as a result of short-term news flow.
Here we consider some potential takeover targets based on three different plausible catalysts.
Potential Targets: Momentum Failure
Whilst the FTSE 100 is up about 7% in the last 12 months and the FTSE All-Share around 6% higher, there have been several notable underperformers that offer opportunities. Note that DS Smith saw a big fall in its stock in 2022 and struggled to recover in 2023 – prompting a bid from Mondi, which then attracted eventual buyer International Paper.
Among the UK-listed stocks on the investor platform, Greggs shares have fallen the most in the last 12 months, down around 30%. Shares have retreated sharply since last year as the pace of growth failed to match that baked in by its lofty valuation. Its own takeover of the high street continues apace, but is this one looking a tad cold? On the one hand it’s hard to make a case for a bid for Greggs given that growth is slowing down. On the other hand, it could offer a large retailer a ready-baked fast food empire with a strong high street presence, enabling cross-selling and horizontal integration of other products.
Moving somewhat the other way is Dr Martens, whose shares have collapsed since its 2021 IPO priced shares at £3.70, giving it a valuation of £3.7bn. It was down about 30% in the last year and trading around 60p with a market cap of around £ 570mn. But, with a new CEO at the helm, it’s gradually turning a corner. In January the company reported sales in the US had improved, although this was before tariffs kicked in. By June's full-year results the company appeared on more stable footing. FY results announced on 5 June showed a 10% reported decline in revenues (8% constant currency). Momentum into FY26 is good and discounting is being reduced. Still a long way to go. Shares jumped to 70p on the update.
On the plus side a potential bidder would have a strong, recognisable brand name to add to a portfolio and could benefit from vertical integration of the supply chain into a bigger parent. In 2023 there were for instance significant problems at its Los Angeles distribution centre that dented its full year profits. Last year shareholder Marathon Partners urged the board to consider a sale and there were reports that the company was facing facing potential takeover bids from various suitors, including LVMH and VF Corporation.
A Simple Valuation Approach
A simple metric for assessing the likelihood of a bid is plain valuation measure, that of enterprise value to earnings before tax and interest. This approach is based on Tobias Carlisle’s 2017 book The Acquirer’s Multiple, which simplified stock-picking to this one metric. It’s not dissimilar to Joel Greenblat’s Magic Formula outlined in The Little Book that Beats the Market.
Among those with some of the lowest EV/EBIT multiples are financial names Paragon Banking and insurer Phoenix. Both sectors – banks and insurers – are in prime consolidation territory and therefore the backdrop for a move is positive. Aviva is acquiring Direct Line in a deal worth £3.7 billion – the competition watchdog is reviewing the deal. Meanwhile dealmaking in the UK banking sector is back on the agenda – NatWest is out of government hands now and a car finance ruling is awaited that could mean billions of pounds in payouts.
Barclays has been steadily buying and the big building societies Nationwide and Coventry have taken out Virgin Money and Co-operative Bank respectively. On the one hand, Paragon is insulated as it’s mainly a buy-to-let lender, which means it’s maybe more likely to be the predator (say for Close Brothers, which relies heavily on car finance). On the other, its shares have been moving strongly higher as its grown its business and could be a juicy offering to one of the larger banks. Note that politicians are keen to see a bigger and more efficient financial sector and regulators appear easier to bring on side.
Execution Failings
Lastly, execution failures can lead to a company becoming a takeover target and our final check is on BP. We discussed earlier this year how it could the big takeover story of 2025, and reports have surfaced about various oil majors including Shell running the slide rule over the numbers. At the heart of this story is execution and a failure to focus enough on oil and gas production. BP’s shares fell behind rivals since its big pivot towards net-zero in 2020 and it’s since had New York activist investor Elliott agitating for change. This has sparked a major strategy rethink and moves to sell its Castrol lubricants business. The question is whether the depressed share price remains attractive. On the one hand it could be too big to swallow for even the likes of Shell or Exxon Mobil; on the other hand the oil and gas industry is ripe for major consolidation given the existential pressures it faces.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Commodity Outlook: Commodities rally despite global uncertainty
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ... -
Quarterly Outlook
Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever
Jacob Falkencrone
Global Head of Investment Strategy
-
Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
-
Quarterly Outlook
Equity Outlook: The ride just got rougher
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
China Outlook: The choice between retaliation or de-escalation
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
Commodity Outlook: A bumpy road ahead calls for diversification
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX outlook: Tariffs drive USD strength, until...?
John J. Hardy
Global Head of Macro Strategy
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy