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The Pac-Man Market

13 August 2021

And still they come, gobbling up their targets. Almost every day sees another UK company in the sights of a Private Equity/US predator. Hot on the heels of the US buyout firm Advent’s shot at Ultra Electronics via its Cobham subsidiary, we have a tussle developing for Meggitt. Both of these are FTSE 250 companies, both considerable providers of defence technology and both have received approaches at massive premiums to their previous market prices.

In the meantime the battle for William Morrison, covered in recent blogs, has left the original bid price of 230p well behind. Last month I suggested 275p should be a reasonable target and, with the final stages of the struggle between CDR and Fortress now playing out, it looks as if the final figure will be somewhere around this level and possibly a little more.  Sure proof, if it were needed, that the WM board was too quick to throw in the towel.

Yesterday Private Equity firm CVC bid for Stock Spirits at a 41% premium to last night’s closing price, although the market seems convinced that might not be the end of the game, with the share price at a 10p premium to the cash bid. As well as GlaxoSmithKline, Paul Singers’ Elliott Partners, the giant activist investor, has been building a stake in FTSE 100 energy provider SSE.

I could go on. Indeed, many will say I have been and I am sorry if this sounds like the same old stuck record but until our equity market sits on a sensible rating we are going to see more and more of our companies disappearing into the jaws of the US/private equity Pac-Men. It isn’t as if these companies are being bought at modest premiums to market prices – they are generally very substantial suggesting the undervaluation of UK equities is considerable. The way things are going we won’t have an equity market left.

China Regulation

A few weeks ago the Chinese government spooked equity markets when it announced greater fintech regulation, particularly with regard to educational businesses in which it banned profits in the after-school tutoring sector. This week the Chinese State Council and the Communist Party Central Committee jointly issued a five-year framework for greater regulation of substantial parts of the economy. These areas include national security (on past performance this could be anything), technology, monopolies, food, drugs, big data and artificial intelligence.

It seems the authorities have a particular eye on Chinese businesses that have listed on Western markets. Companies that have been funded by the West could find themselves under threat and it is difficult to know just how far the regime would go. Could it be such companies are forced to delist in the West and relist in Hong Kong or Shanghai? Who knows? What can be said, though, is that the current government, under President Xi Jinping, is reversing much of what has been achieved over the last three decades.

The Chinese and Hong Kong equity markets have shown tremendous growth over the last twenty to thirty years as China has moved from the third world to developed nationhood. This has been reflected in the performances of China focussed investment trusts and funds which have produced stellar returns for share and unit holders. I do not feel we can look forward to a continuation of this over the next few decades. Indeed, I believe the above blueprint represents a five-year warning to the West.

Human nature can be a strange thing, particularly where market investment is concerned. It can take a great deal to convince markets that a trend has changed, especially when that trend has been so strong for so long. Broadly, the fund managers continue to plug the markets that provide their livelihoods, no doubt pointing to the potentially strong economic growth still likely and the individual investors accept that little has changed. At some point the penny will drop that things are changing for good. No longer does China aspire to become a free market, open economy. Xi Jinping is beginning to look a bit like Chairman Mao. Past agreements mean little – Hong Kong laws are changing and who can say how deep these changes will be in future?

I feel we may have a year or two before that penny finally drops so should be looking at this window to exit China for good. I appreciate that some of our investors have considerable gains on such stocks and that Capital Gains Tax is a factor. If so, by all means call us and we can try to help plan an exit but exit I think we must!

Disney  – Update

I’ve said it before and I make no apology for repeating it – Walt Disney is the epitome of a well-run company. It has used the pandemic to refocus and expand its streaming offering to great effect and it emerges from the most problematic of periods in very good shape. Third quarter figures reported last night after the Wall Street close looked excellent, beating market expectations on pretty much all fronts. Streaming subscribers hit 116m versus a consensus of under 113m. Revenues grew 45% to $17bn and reported a $995m profit versus last year’s loss of $4.8bn. Adjusted earnings per share jumped to 80 cents from 8 cents last year.

Obviously there are still restraints while Covid remains. Reduced capacities across the theme parks and cruise ship sailings as well as higher Covid related operating costs will all have an impact. However, these figures illustrate clearly that this great business has coped well and should be back on its long-term growth trajectory soon. First recommended around $112, expect a strong performance when the shares open in the US this afternoon and I would not be surprised to see them approaching the $200 mark pretty soon. A very firm hold.


Russell Dobbs FCSI

Chartered Wealth Manager