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“After a difficult few days, European markets had a spring in their step on Thursday,” says Dan Coatsworth, Investment Analyst at AJ Bell.
“The FTSE 100 advanced 0.2% to 8,290, led by Admiral which jumped 3.5% on positive read-across from Aviva’s move on Direct Line.
“It’s normal to see other companies in the same sector jump when there is takeover activity as investors consider who else might be bid targets or are trading too cheaply. There is no suggestion that someone will bid for Admiral but that hasn’t stopped it having its moment in the sun.”
Royal Mail
“Royal Mail’s owner International Distributions Services is already in a takeover situation and there are reports the sale is close to being finalised. Daniel Kretinsky’s EP Group has made a series of promises to keep part of Royal Mail going as before, including on elements of pricing and branding.
“Longer-term, it’s likely that the Czech billionaire will change the way the business is run, as the current set-up is riddled with flaws. It needs to be run more efficiently and that will require big changes.
“For now, it feels like he’s offering enough guarantees to reassure the government that he’s a responsible owner for one of the UK’s most iconic businesses.”
Ocado
“The ground beneath Ocado’s feet continues to crumble. Following the decision by several clients in the US and Canada to scale back expansion plans involving Ocado’s facilities, setbacks have now spread to the UK.
“Morrisons currently shares two Ocado fulfilment centres with the Marks & Spencer/Ocado joint venture, but it now plans to only use one of the sites. The important takeaway from this announcement is that Morrisons is going to rely more on in-store fulfilment alongside the remaining Ocado centre. That’s as big of a red flag as you can get for Ocado’s business model.
“Ocado’s strategy is centred on the use of automated robots in big warehouses. It believes these are far more efficient than sending grocery workers up and down supermarket aisles with a shopping list, filling a basket. Many supermarkets would argue otherwise, particularly because so many people still prefer to do their weekly shop in person and online demand isn’t growing as fast as one might have expected four years ago. The goods are already on the shelves in the supermarket and it doesn’t take long to fill a basket.
“It’s expensive to run a warehouse, get the goods in the van and deliver them to someone’s house. While the customer pays a delivery fee, that money is soon gobbled up by the associated costs. One has to consider whether the fee is enough to cover wages, fuel, vehicles and so on. Fundamentally, supermarkets would probably prefer their customers to visit their stores.”
Direct Line
“What took Aviva so long to move on Direct Line? Aviva has been basking in the glory of asset disposals for some time, yet the excitement from large shareholder distributions has now faded away. The fundamental problem around how Aviva will accelerate growth has returned to the forefront, and low and beyond it has dusted off the M&A playbook.
“In this situation, buying a long-standing rival is the obvious manoeuvre and it has helped that Direct Line is still on its knees after a disastrous few years. That’s depressed its valuation and allowed for Aviva to step in while the shares are weak. Direct Line has already fought off bid interest from Ageas, so its defence strategy is still fresh to use against Aviva.
“Direct Line’s board has rejected Aviva’s approach yet its shareholders might welcome a bid, particularly if the takeout price helps to make up for the big losses from the past two years or so. Aviva’s 250p offer equates to a 57.5% premium to last night’s closing price. That’s a decent bid premium and some Direct Line investors might be happy at that price. Should Aviva be able to dig deeper and offer something in the region of 275p, Direct Line’s shareholders might feel that Christmas has come early.
“Direct Line has tremendous brand strength in the general insurance market and significant scale, which makes it a highly attractive takeover target. While there are a few issues to iron out, longer-term it’s easy to see why a rival would want to buy the company.”
Dr Martens
“The bootmaker has a recovery plan and it knows what’s needed to fix the business. It’s now a waiting game for the strategy to play out. Half-year results are too early to judge the turnaround efforts, but there is enough to silence the critics and pique investors’ interest.
“Revenue and earnings are falling and the dividend has been cut sharply. That’s not a surprise. The reason why the shares have jumped is new guidance for cost savings to hit the top end of previous guidance, inventory is coming down and the company has reported strong sales of new product. These nuggets are exactly what’s needed to rebuild credibility with the market.”
Microsoft
“The phrase ‘With great power comes great responsibility’ might be associated with Spiderman or Socrates but it could also extend to Microsoft. The tech company has become so large that authorities worry it has become too dominant. Microsoft might argue its market-leading status has been hard-earned, yet others might say it’s potentially got to the top by crushing the competition through any means possible.
“There has been a lot of chatter around antitrust probes and Alphabet has been on the receiving end of a clampdown in recent weeks. Now it might be Microsoft’s turn. Bloomberg reports that the US Federal Trade Commission has opened an antitrust investigation into Microsoft, looking across its business. There are suggestions that Microsoft’s licensing terms and bundling of software with cloud services makes it harder for other companies to compete.
“It’s clear there is a desire across governments and regulators to have a more level playing field and let multiple companies thrive, not simply a select group at the top. This is set to be a major theme in 2025 and investors need to be alert to how a chunk of the Magnificent Seven could be forced to do things differently.”
Loungers
“Takeover activity was red hot on the UK market, with action being recorded at the middle and lower ends of the market cap spectrum.
“Among small caps, hospitality group Loungers is being gobbled up. It was only a matter of time before Loungers was taken over as it never seemed to click with the market despite showing considerable progress since floating in 2019.
“So many UK-listed companies are being taken over because the market didn’t spot the value on offer. Interestingly, it turns out that Loungers put itself up for sale earlier this year because it acknowledged the market wasn’t attributing fair value, so selling to a third party was an alternative way of generating an uplift for shareholders.”
These articles are for information purposes only and are not a personal recommendation or advice.
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