3 FTSE 100 takeover targets

10/05/2024

The FTSE 100 has done well so far in 2024. In fact, it’s made a series of new all-time highs in recent weeks.

At the same time, the UK continues to be a hotbed of takeover activity.

According to research by the Evening Standard and investment bank Peel Hunt, “companies worth over £26bn have already agreed to be sold in 2024, to other listed firms or private equity.“

Even though the Footsie is on a tear, the amount of deal-making going on suggests to me there are plenty of UK stocks that trade buyers and private capital view as undervalued.

Let me tell you about three FTSE 100 firms that could be ripe for a bid.

Target #1

Burberry‘s (LSE: BRBY) shares have slumped from an all-time high just over a year ago. And its market capitalisation has shrunk from near £10bn to little more than £4bn.

The backdrop for this is a slowdown in demand for luxury fashion. Abrdn investment manager Sasha Kachanova recently told the Telegraph: “Burberry remains a potential takeover target, particularly at its current valuation.“

Cheap, unique and desirable

In addition to Burberry’s low valuation (relative to peers like LVMH Moet Hennessy and Hermès), Kachanova made another good point. She said: “As the sole British brand of scale operating independently — a rarity in the luxury industry — it boasts a rich heritage and the opportunity to enhance its iconic product lines and accessories.“

This is significant because consolidation is the name of the game in the luxury sector. Most recently, Tapestry (owner of Coach, Kate Spade, and Stuart Weitzman) has agreed an $8.5bn acquisition of Capri Holdings (owner of Jimmy Choo, Michael Kors and Versace), although the US competition watchdog is trying to block the deal.

Given Burberry’s low valuation and unique positioning as an independent, distinctly British luxury fashion house, it’s hard to believe it’s not of interest to sector consolidators.

Target #2

Standard Chartered (LSE: STAN), with a market capitalisation of around £20bn, is one of the big five FTSE 100 banks. It has a unique footprint across the world’s most dynamic markets and trade corridors in Asia, Africa and the Middle East.

Its shares can currently be bought at a 33% discount to its tangible net assets. The directors chastised the market for its low valuation of the stock earlier this year. And I reckon that can be partly read as a tacit acknowledgement that the bank could be vulnerable to a bid.

Takeover talk

In January last year, US financial site Bloomberg reported that First Abu Dhabi Bank was working on a takeover of Standard Chartered. First Abu Dhabi confirmed it, but said it had decided not to proceed.

This year, UK deals site Betaville has reported rumours of renewed interest in Standard Chartered. The speculation is the interest is from ‘the Gulf region’.

Meanwhile, Ian Lance, co-manager of Temple Bar Investment Trust, has suggested potential wider interest. “If a big US bank wanted to have a footprint across Asian markets, they could buy Standard Chartered,” he told fund data website Trustnet.

Target #3

Reckitt (LSE: RKT), the Cillit Bang-to-Durex consumer goods group, has been out of favour with investors for some time. It’s still the biggest of the three ‘takeover targets’ I’m highlighting today, with a market cap of over £30bn.

However, consumer goods companies as big as drinks giant Diageo (£60bn) and even Unilever (£105bn) have been touted recently as possible takeover targets in some quarters.

Obvious, but with a caveat

Russ Mould, investment director at broker AJ Bell, said recently: “Reckitt looks like the most obvious takeover target on the FTSE 100 given a sharp decline in its share price following strategic mistakes and legal action around one of its baby formula products.“

However, that legal action, which Reckitt is appealing, could potentially lead to multi-billion-dollar compensation liabilities. So, while Mould sees Reckitt as the most obvious Footsie takeover target, he’s absolutely right to concede: “The big unknown is whether someone would want to pounce now or wait for the legal issues to be resolved.“

Final Foolish thoughts

I wouldn’t want to invest in Reckitt, Standard Chartered or Burberry simply in the hope of making a quick profit from a takeover bid.

No, for me, it’s more a case that companies can often make for good long-term investments when they have the kind of business characteristics and depressed market valuations that are likely to be fundamentally attractive to trade or private equity buyers.

Having said that, I do expect the spate of takeovers of London-listed companies to continue!

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