UK mid-caps could attract more M&A interest as valuation gap persists

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UK mid-caps M&A interest

Highlights

Tate & Lyle and Spire Healthcare received takeover bids with 57% and 66% premiums, reflecting heightened M&A interest in undervalued UK mid-caps.
FTSE 250 companies, typically 60–75% of UK-listed takeover targets, currently trade at 12x forecast earnings versus 17x for the S&P 400 MidCap index.
Among the FTSE 250, 52 companies, including Applied Nutrition and Trainline, show annual sales growth above 10%, but operational risks and mixed outlooks persist.

Valuation gap fuels takeover appeal

As reported by Financial Times, dealmaking in the UK mid-cap segment is regaining momentum as bidders pursue companies whose market prices appear depressed by concern over the country's economic outlook.

Tate & Lyle has received a 2.7 billion pound bid from U.S. peer Ingredion, while Spire Healthcare is weighing a 1 billion pound offer from its second-largest shareholder. The premiums to their pre-bid prices, 57 per cent and 66 per cent respectively, stand well above the roughly 30 per cent level that has traditionally been common in takeovers.

Mid-sized companies have long accounted for a large share of bids for UK-listed businesses. According to Dealogic data cited in the text, FTSE 250-sized groups typically represent about 60 per cent of all such bids over the long term, and since the Covid-19 pandemic that share has been closer to three-quarters.

Compared with the FTSE 100's larger multinationals, FTSE 250 companies are more exposed to the domestic economy. At about 12 times forecast earnings for the coming year, according to LSEG, the FTSE 250 trades well below the S&P 400 MidCap index on 17 times forward earnings, a gap that could encourage U.S. buyers and support stock-funded deals.

Active investors may revisit the sector

The index remains highly mixed, combining companies with strong operating momentum and others facing more difficult outlooks. Lex analysis of LSEG data in the text says that after excluding closed-end funds, real estate investment trusts and companies whose revenue has not risen in three or more years, just under half the FTSE 250 remains.

Among that group, 52 companies are delivering average annual top-line growth of at least 10 per cent, well ahead of forecasts for UK growth and inflation. Examples include Applied Nutrition, Trainline and engineering group Goodwin, alongside financial names such as AJ Bell and energy businesses ranging from oil to battery producers.

Sales growth does not remove operational risk, however. Wizz Air, identified as the fastest-growing company in the set, is also contending with a possible fuel shortage, economic weakness and wars affecting important markets, while stretched balance sheets can also undermine fast-growing businesses.

That mix of rising and declining companies makes the mid-cap index better suited to active stock selection and opportunistic acquisitions than passive index tracking. If merger activity continues to build, broader fund interest in the sector could also increase, potentially lifting valuations even if takeover premiums become less generous.

Our earlier report on moderating UK pay awards highlighted signs that the labour market is cooling, with median settlements easing back to around 3% and wage growth slowing to the weakest pace since 2020. We noted that this softer wage momentum is an important input for the Bank of England’s inflation assessment, especially with energy-price risks still elevated due to the Iran war.

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