FTSE 100 takeovers gather pace; who might be next?

At the start of 2024, I speculated that interest rate cuts could lead to takeovers involving bigger companies than the type of deals seen in 2023. While the rate-cut journey remains in its infancy for the UK and other key geographies, the predicted wave of large-cap takeovers is firmly in motion. It’s a reminder there is value on the UK market in droves.

There have been bids or expressions of interest for five FTSE 100 companies so far this year including Anglo American, Darktrace, DS Smith and Rightmove. In addition, we’ve seen bids for mid-cap stocks including banking provider Virgin Money, housebuilder Redrow, Royal Mail owner International Distributions Services and drinks group Britvic, among others. Takeover rumours have also circulated about insurer Hiscox and outsourcing group Serco.

There were four common themes to last year’s wave of takeovers. Acquisitions enabled the buyer to expand into a new country. We saw private equity firms use their large cash piles to snap up companies where they were prepared to take a long-term view rather than worry about near-term problems. Elsewhere, certain buyers made offers based on the premise that a target was looking cheap and its recovery efforts should happen out of the public spotlight.

The fourth theme is the one that’s really gathered pace this year. The suitors have pounced on the companies while their shares were depressed by various bits of unwelcome news, taking the view this was a rare opportunity to buy a business cheaper than it might normally trade.

DS Smith share price

Source: LSEG

The chart of DS Smith is a perfect example. Its share price saw a big fall in 2022 and struggled to recover in 2023. In early 2024, Mondi made a bid for the group which enticed a second party to also throw its hat into the ring. International Paper wasted no time in making its own offer for DS Smith and that deal is heading towards completion.

Rightmove share price

Source: LSEG

As for Rightmove, its share price had gone sideways for two years amid investor concerns about a lacklustre UK property market and a new competitive threat. Australia’s REA recently confirmed it is interested in buying the group but hadn’t made a formal bid at the time of writing.

FTSE 100 stocks with negative 12-month returns

Given the spate of takeover activity among the biggest companies on the UK stock market, it begs the question of which other companies in the FTSE 100 might be takeover targets because of share price weakness.

Worst performing FTSE 100 stocks over the past 12 months

Source: AJ Bell, SharePad. Data to 2 September 2024

Analysis by AJ Bell finds that 22 companies in the FTSE 100 have seen a negative share price performance over the past 12 months, a period when the UK index has increased by 12% in value.

Certain companies have suffered mistakes of their own making, others suffered weakness in their end markets. Four names stand out from the crowd as being vulnerable to takeovers: Burberry, Entain, Diageo and Whitbread. Here are the reasons why they might be targets.

Burberry share price

Source: LSEG

Burberry’s shares have fallen by 70% in value over the past 12 months. The stock is now trading at a 14-year low and at the time of writing is about to lose its place in the FTSE 100 following the quarterly index reshuffle. Any potential bidders would have to see through near-term problems and be confident in the company’s ability to get back on track.

The decision to take Burberry more upmarket and then heavily discount products to shift unsold stock was a bad move. While shoppers love a bargain, discounting can tarnish a luxury brand.

Making matters worse was a lacklustre economic rebound from China post-pandemic, given the country has historically been a rich source of earnings.

What makes Burberry appealing to a potential buyer is the enduring appeal of its products. There is instant brand association with its chequered patterns. While styles go in and out of fashion, Burberry’s products have stood the test of time.

Entain has already had two bids… more to come?

Ladbrokes’ owner Entain has previously been subject to takeover interest from MGM and DraftKings, but neither suitor was successful. Since then, Entain’s share price has drifted downwards and left it a sitting duck. Buying Entain would be one way for a rival company to increase scale, something that really matters in the gambling sector.

Entain share price

Source: LSEG

The stock is down 45% over the past 12 months, partially dragged down by a bribery investigation and losing share in the lucrative US market. The company has also faced accusations that it overpaid for acquisitions.

A new CEO joined this month, which raises the prospect of a sweeping review of the business and potentially strategic changes. The pressure is already on, given activist investors on the shareholder register.

One might ask why any potential bidders haven’t already shown their cards this year given the share price weakness. It might be that they want to see a repair job at Entain before swooping in.

While that might result in a bidder paying a higher price than now, it would mean the suitor makes an offer once risks have lowered.

Too big to buy?

Shares in Diageo are down 23% over the past 12 months thanks to disappointment around performance in Latin America. In July, it reported an operating profit decline in four out of its five operating regions, two of them in substantial double-digit territory.

Diageo share price

Source: LSEG

Management seems to have taken its eyes off the ball when it comes to monitoring inventory levels and working out ways to keep consumers spending.

The most recent results didn’t include a new share buyback programme, which troubled investors. That’s not a surprise given the balance sheet is close to the edge of the company’s comfort zone. Diageo targets 2.5 to 3 times net debt to adjusted earnings and the leverage ratio is now sitting at the top end.

While the current news flow is fairly gloomy, Diageo could be a takeover candidate for a bidder looking to own a portfolio of well-known drinks brands and wanting to pick up an industry giant at a big discount to where it has historically traded. The key sticking point is the fact such a takeover deal would require a significant cash outlay, even if the bidder got a bargain price.

Diageo is currently worth £55 billion. Apply a potential 30% bid premium and a suitor would need to stump up a large amount of money. One route might involve breaking up Diageo, with a beer company taking on Guinness and another company taking on the spirits brands.

Hit by growing pains

It’s not been the best time for Premier Inn owner Whitbread, with its share price down 17% over the past 12 months. The market has been worried about a lack of organic growth in its UK operations and that we won’t see a major improvement any time soon. German operations are performing better but they only account for small part of the group.

Whitbread share price

Source: LSEG

While certain investors will be disappointed at the company’s situation, there is the potential for Whitbread to be on the radar of private equity or an overseas-based operator looking to get ahead in the UK through buying one of the country’s best-known hoteliers.

The shares are trading on a low rating of 12.2 times consensus earnings for the year to February 2026. That bargain-basement rating, together with weak market sentiment towards the stock, could be enough to draw out a bid. Premier Inn is front of mind for consumers looking for affordable accommodation and scores well with tourists seeking decent, reliable hotels when visiting the UK.

Past performance is not a guide to future performance and some investments need to be held for the long term.