M&A prospects in UK  jump as stocks look cheap after pound falls

Bloomberg

A flurry of mergers and acquisitions in UK companies may be near as a plunge in the pound has made them more attractive to foreign buyers, according to investors participating in different spheres of the market.
Private equity giant Blackstone Inc, $5 billion hedge fund Toscafund Asset Management LLP and strategists at Jefferies are united in calling a possible burst of deals in the UK after a rally in the dollar and economic and political chaos in the country leaves the nation’s assets relatively cheap.
Looking at UK companies, “you’ve basically got good cash flows, you’ve got strong balance sheets and they’re 40%, 50% cheaper than they were a year ago,” Mark Tinker, chief investment officer of Toscafund HK Ltd., said in a Bloomberg Television interview. “There’s quite a lot of value here.”
UK companies both in and outside the stock market have become cheaper for dollar investors this year as the pound has plunged 17% against the greenback. That mainly reflects increasing demand for the US currency as the Federal Reserve has moved aggressively to raise interest rates. Political turmoil in London, combined with surging inflation and a looming recession in the UK, have been other headwinds weighing on the market.
“UK companies offer excellent value as they are essentially self-funding purchases,” Jefferies strategists including Sean Darby wrote in a note. The dollar is at least 15% over-valued versus the pound, they said, “almost the same as the average takeover premium.”
Blackstone’s Chief Operating Officer Jonathan Gray said in a Bloomberg Television interview that dislocations sparked by UK political turmoil are creating investment opportunities for his firm as the pound has slumped and stocks in the UK are trading at less than nine times earnings.
“The near term may be tough, but as long-term investors, we like to look at these things and think about the opportunity to make investments into dislocated moments — which is clearly what we’re seeing now,” Gray said.
Liz Truss’s resignation as UK prime minister on October 29 after her low tax, high growth vision spooked investors could also boost the appeal of the nation’s assets. Since she made the announcement, the pound has fallen further against the dollar.