Mark Wright, Fund Manager at Seneca Investment Managers, takes a look at mid-cap M&A activity.
“We invest predominately in mid-caps for a number of reasons, not least because when selected on a valuation and quality basis, they can offer good dividend opportunities and a long-term potential for growth.
“Whilst small-cap companies tend to be earlier in their business models and less proven, hence a greater risk of failure, and large caps tend not to offer the undiscovered value opportunities we seek, we see the mid-cap space as offering a balance of both. One of the exciting areas is the potential for consolidation, with the prospect of enhancing returns.
“I’m optimistic about the M&A outlook for mid-caps. Despite the uncertainty that Brexit casts across the market, one thing it does provide is opportunity. This uncertainty may well have contributed to keeping interest rates low at a time when the Bank of England would conventionally be looking to raise the base rate. This creates an attractive opportunity to foreign buyers who may see cheap debt and a weak pound as too much to resist. Despite macro uncertainty, the fundamentals often remain the same, offering some real value to those willing to buy.
“Dairy Crest is one such example having recently received an offer from Saputo for (what I think is) below its intrinsic value. Dairy Crest has reduced its debt, improved its pensions deficit and is rolling out new products, yet still went for less than it is probably worth.
“Uncertainty is often the enemy of business, and many dealmakers will likely exercise caution with such a great unknown just around the corner. However, whilst in theory M&A activity should stall with the uncertainty of Brexit, a number of the incentives mentioned above will be keeping dealmakers on their toes over the coming months.”