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  • Writer's pictureMark Watson-Mitchell

The Small Cap Bid Scene Is Really Heating Up

It has been reported that the recent slump of IPOs on the London markets is due to the financial press pundits being so negative about overall strictures and conditions.

Just a week ago Winterflood, the Small Cap jobbing specialists, reported a 75% dive in profitability to just £3.5m, its worst performance for more than a decade, indicating, it is said, a shunning of small-cap stocks by UK investors.

There has been a big drop in overall dealing activity in second-line shares.

In turn that has been reflected in lower corporate ratings, to levels that are perhaps too cheap to be ignored by wise, patient investors.

The PEs Are Swooping Attracted By Low Ratings

There has been a significant increase in Private Equity interest in companies valued within the £25m to well over the £250m valuation range.

The PE boys are well capitalised and able to take a longer-term view on the development of underlying assets, especially with a view to eventual trade sale or returning acquired companies back onto the UK equity markets.

It is evident that private investors really are missing out on taking positions in potential PE prey.

If they were more aware, then company ratings would be far higher than currently pinned on UK small caps.

Due to the lower trading activity and those ensuing low ratings it has been totally natural for not only the Private Equity fraternity investigating likely victims.

We started the year with the £271.7m acquisition of K3 Capital Group, the professional services business, by Sun European Partners, a subsidiary of the US-based private equity firm Sun Capital Partners Group.

In April the Sureserve Group was approached with a £200m bid from Cap10, a European private equity group, which later proved to be a successful move.

At about the same time the US-based PE company Apollo Global Management made an unsuccessful offer to Matt Moulding’s THG, the online health and nutrition retailer.

That month also saw the European private equity players IK Investment Partners making a £269m offer for the Medica Group, the teleradiologist specialist.

In July the Inflexion Private Equity Partners made a 100p a share bid for the £345m legal services outfit DWF Group, which looks to now be drawing to a conclusion.

Moving closer to a conclusion is the private equity DBAY £143m cash offer currently underway for the Finsbury Food Group.

Insiders Have Also Been Buying

Directors of quoted companies often complain about the low valuations accorded to their businesses.

Understandably it must be so frustrating at times for bosses to see other companies within their sector on far better ratings, while their capitalisations remain way behind, despite comparative profits and margins being earned.

I have frequently spoken with directors who can not understand why the market seems to be missing out on the value that they perceive themselves.

Frequently they are approached by potential bidders, who wish to swoop in and snap up cheap equity positions or even the entire businesses at such low levels.

It is not surprising that many of them give a good listening to the words of financiers who would wish to fund out private bids on behalf of ‘insiders’.

Take a look at the digital security group Kape Technologies, earlier this year accepting a bid from ‘insider’ Teddy Sagi’s Unikmind, worth £1.25bn. He already controlled so much of the equity, some 54.8%, that he did not want someone else coming in and taking the prize away from his grasp, so he took it back into his hands.

Another such example was when shareholders in Xpediator, the delivery group, in April accepted a £62m takeover led by former CEO Stephen Blyth.

While Foreign Companies Have Been Moving In

In April the Glasgow-based sausage casing maker Devro succumbed to a £692m bid from Saria Nederland, the Dutch subsidiary of the German Saria group.

Also in April, Deutsche Bank made a recommended £410m cash offer for the Numis Corporation, the stockbroking/investment banking group.

Elsewhere Pending

The delivery service specialists DX (Group) could be seeing a possible 48.5p a share cash bid being firmed up H.I.G. European Capital Partners. It has until 5pm on next Monday to make an offer or announce that it does not intend to proceed.

The cross borders financial services provider STM Group is in receipt of a 67p a share cash bid from Edmund Truell’s Pension SuperFund Capital.

My favourite waste management group Renewi is now rebuffing a £636m bid approach from the Australian asset manager Macquarie, while the hedge-fund manager Coast Capital Management has subsequently increased its stake in RWI.

And finally, currently Pendragon, the motors group, is under bid-attack from companies in Sweden and the USA, having received some five bid approaches to date.

My View – Offering So Much Untapped Value

There is a very firm undercurrent in the Small Cap sector.

It is without doubt that private equity groups from the US, Europe and elsewhere are studying potential values of the sector’s constituents.

They know that with their money they can just wade into the equity of these undervalued businesses and earn a score from doing so, whether taking a short or medium-term position.

The purpose of this column is to identify investment opportunities for readers, I do not always get it right, however apart from THG, I have Profiled all of the above companies on the basis of judged value and will continue to do so.

Investors should not dismiss the real upside offered by taking a view on such companies.


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