The emergence of a possible bid for BP (BP.L) by the United Arab Emirates' state-owned oil group has thrown a spotlight on the vulnerability of the Britain's largest companies to takeover and the threat to London as a global capital markets hub.
New York's larger investor base and easier access to capital compared with London are reflected in higher valuations, which have encouraged several UK-based companies to list there, including chip maker Arm.
"London is a market for sale," Charles Hall, Head of Research at brokerage Peel Hunt told Reuters. "If you have lowly valuations it's absolutely inevitable that lots of overseas investors and private equity will run the slide rule over your companies."
Britain's policymakers have been planning new initiatives to draw investors back to the UK stock market and convince companies to list in London after years of fund outflows have sunk the valuations of UK companies.
"It is only a matter of time before someone moves on BP," said Dan Coatsworth, investment analyst at AJ Bell. "One by one the UK market is being picked off by foreign companies or private equity firms who recognise the value that’s on offer and how an acquisition could either strengthen their market position or make them a tidy profit over time."
Barclays head of European equity strategy Emmanuel Cau said in a note this week that Britain's decision in 2016 to leave the European Union has weighed on the market since, with growth stagnating and biggest equity outflows across all major regions.
Even as London's blue chip FTSE 100 index neared its record levels on Friday, based on forward earnings it keeps trading near its deepest discount compared to U.S. markets. The FTSE's 12-month forward price-to-earnings ratio, at around 11.22 compared to the S&P 500's 21.14, representing a discount of around 47%, the widest since at least 1990.
Hall has already warned that the FTSE Smallcap index (.FTSC) could cease to exist by 2028, if the pace of outflows and takeovers continues and companies keep choosing other countries to list in or even shift their UK listing.
Last year, Dublin-based online betting company Flutter and building materials company CRH both announced plans to move their listing from London to New York.
This week, Shell (SHEL.L) CEO Wael Sawan was quoted as saying the British company was looking at "all options" including switching its listing to New York from London.
His predecessor Ben van Beurden also said this week that European oil companies will find it increasingly difficult to compete with U.S.-listed rivals.
There was "a deeper pool of investors and capital in New York and the attitude is more positive towards oil and gas companies," van Beurden, who stepped down in 2021, told the FT Commodities Global Summit.
"All of this conspires against companies listed in Europe," he said, describing Shell's shares as "massively undervalued."
A takeover or listing shift, would bring with it the loss of tax payments, investment, high wealth jobs.
"This will make us poorer for decades to come because if the likes of a BP and Shell leave that is a vast transfer of capital from our country to another country," Hall said. "This is happening in a microcosm all over the UK equity market."
FTSE M&A HEATING UP
Investors and analysts have often speculated in recent years about BP becoming an acquisition target due to its deep discount compared with rivals.
Shares of Europe's top three oil companies Shell, BP and TotalEnergies have underperformed U.S. rivals Exxon Mobil and Chevron over the past decade. The gap in part reflects European firms' larger investment in low-carbon energy under pressure from investors.
To be sure, a takeover of BP would likely face stiff regulatory and political scrutiny, but the reported potential interest was enough to help the FTSE 100 flirt with all time intraday highs.
So far, most of UK activity has focused on smaller stocks but the potential targets are starting to get bigger and even leading to bidding wars.
In February U.S.-based warehousing firm GXO Logistics offered to buy UK peer Wincanton for about 762 million pounds ($949.22 million), topping a bid from CEVA Logistic.
Last month, Keysight Technologies offered about 1.16 billion pounds for telecoms testing firm Spirent Communications, outbidding rival Viavi Solutions. Also in March, U.S. group International Paper trumped an offer from UK-listed Mondi for Britain's DS Smith.
London-listed Currys and Direct Line also this year attracted bids that they ultimately spurned.
Takeover activity has helped drive Britain's blue-chip index higher in recent weeks, bringing it within sight of its record high from February 2023.
($1 = 0.8028 pounds)
