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For many years I have argued that UK shares are too cheap. Meanwhile, the FTSE 100 and FTSE 250 They have gone virtually nowhere for five years.
And while London shares look cheap, both geographically and historically, some FTSE 350 stocks are deeply undervalued. In fact, I suggested at the end of 2023 that this year could be important in terms of acquisition approaches for unloved British companies.
Another offer
My assumption was that in 2024 there would be between five and ten takeover bids from large London-listed companies.
As luck would have it, the news of one broke on Saturday (February 17). The latest company to enter the crosshairs of well-funded bidders is the high street e-chain. curries (LSE: CURIO).
Founded in August 2014, Currys brought together two famous retail brands: Dixons Retail and Carphone Warehouse. The group currently has 815 points of sale in eight countries, after closing all 531 Carphone Warehouse stores in the UK during the Covid-19 pandemic.
Unfortunately, Currys shareholders have fallen on hard times for years. As I write, the share price has plunged 37.1% in one year and has plummeted by almost two-thirds (63.7%) in five years.
What's more, on April 23, 2021, Currys' share price closed at 156.2 pence, close to its five-year high. On Friday (February 16), the stock closed at 47.08p. This values the group at £536.6m, a fraction of previous highs.
And just like in the natural world, when companies are weak and stock prices have plummeted that is when predators strike. Currys has received an unsolicited offer from Elliott Management, a major American activist investor, hedge fund and private equity firm.
On Saturday afternoon, Currys' board announced that it had unanimously rejected a cash offer at 62 pence per share on Friday. This is almost a third (+31.7%) higher than the closing price on that day, valuing the chain at just over £700 million.
Let the dance begin
This means the mergers and acquisitions (M&A) dance has begun for another undervalued UK-listed company.
Typically, this dance begins with the target board rejecting the initial approach, arguing that this first offer “significantly undervalues” the business. Currys followed through by saying exactly this on Saturday, after Elliott previously admitted that he was considering a cash offer for the group.
What usually happens next is that the potential buyer comes back with a second, improved offer. Typically, this tends to be 10% to 20% higher than the first offer. Often, a third-higher price is revealed, at which point many M&A dances end with a successful purchase.
Of course, there is no certainty that Elliott will make a formal offer for Currys. Instead, he may choose to walk away if the numbers don't stack up to a higher price. However, under UK procurement rules, he has until March 16 to make a firm offer or withdraw.
When the stock market opens on Monday morning, I expect Currys' share price to jump to a level close to the offer of 62p per share. This discount will balance the likelihood of the deal going through with the likelihood of a higher offer emerging.
This supports my long-held feeling that too many UK-listed companies are wildly undervalued. Furthermore, I hope that this way even more value will be unlocked for long-suffering shareholders in 2024-25.
