Brexit or no Brexit, the duo said they expected M&A activity in the UK to pick-up toward the end of the year.
“The M&A universe is very rich in the UK,” said Huet. “Of course I think the M&A recovery would have been more rapid in the event of a vote to remain, but even with the Brexit outcome we can see that M&A is going to recover.”
The £24bn acquisition of British semiconductor ARM Holdings by Japanese telecoms company SoftBank in July was just the tip of the iceberg, according to the pair.
ARM Holdings was a constituent of the UK version of EDR’s flagship Europe Synergy Fund following its launch back in April. The SoftBank takeover deal resulted in a 71% capital gain, making July the best performing month for the EDR UK Synergy Fund.
That said, Lecoq and Huet made a conscious decision to limit the portfolio’s exposure to domestic companies from the inception of the fund in order to protect against the likely volatility around the referendum. The two still prefer FTSE 100 large and mid-cap companies for the moment.
Still, they insist the conditions are right for more movement on the M&A front.
“The rationale is there from a sectoral point of view but also a financial one,” explained Lecoq. “The level of interest rates set by the Bank of England is still a huge support for M&A, as is the persistent slow level of growth. If companies cannot generate growth by themselves, they will be keen to buy growth if they can.”
The weakness of the pound is yet another trigger, added Lecoq. “Even if the pound were to stay at the level it is at currently and not weaken further, UK assets would still look very attractive valuations-wise to Japanese, US and European investors.”
One sector with attractive valuations and target companies is industrials, said Lecoq.
“Many companies in this space are very cheap and are operating on a niche business model, which could draw in big US names. The aerospace equipment company Meggitt, currently among our top five holdings, is looking like a potential takeover candidate. The same can be said of engineering company GKN. They have an automotive division that is growing significantly above the market, but they are currently trading at a discount due to a pension deficit issue. I could see GKN being acquired by a large UK defence company or private equity house,” he added.
And Huet argues that the ongoing battle between hotel operators and reservation agencies will put further pressure on players in that space to consolidate in order to remain competitive. The duo’s UK Synergy Fund currently holds InterContinental Hotels Group, a UK-listed company whose assets are mainly based in the US and China.