The UK is in the business of “reindustrialising”, says the prime minister. If we are, an increasing portion of the activity will be under foreign ownership. Tuesday brought yet another overseas private equity swoop on a FTSE 250 industrial firm.
This time it’s the Macclesfield-based Bodycote, which describes itself as “the world’s largest service provider of heat treatment and specialist metallurgical technologies” – think, for example, processes and coatings to toughen jet engine blades. The buyer is the US buyout firm Veritas for £1.65bn or 940p a share, or £1.85bn including debt. Unless, that is, the rival bidder, CVC, a European private equity firm, comes back for another bite, which the market clearly thinks is a possibility because Bodycote’s shares closed at 955p.
The shame is that one cannot call 940p a stunning price. The valuation “does not appear particularly generous on a take-out basis”, said an analyst at the investment bank RBC, noting that it’s only 25% above the pre-bid level and the implied earnings valuation is merely in line with Bodycote’s 10-year average.
Indeed, nine-tenths of the “reasons for recommendation” section of Bodycote’s announcement sounded like an argument for doing the opposite. The passage started by saying how well the medium-term “optimise, perform, grow” strategy adopted in late 2024 was going. The plan was designed to find efficiencies and shift towards the expanding aerospace and defence sectors in pursuit of enviable financial metrics, including 20%-plus operating margins and a return on capital employed of 15 to 20% through the cycle. Good progress has been made, say the directors.
On the way, there has been enough spare cash for £120m of share buy-backs while maintaining a 38-year record of growing or maintaining the dividend. And the board is “confident in the ongoing execution” of the strategy, with “the majority of remaining improvements under Bodycote’s control”.
It was only in the last sentence that the company also said it was “mindful of increasing structural challenges in certain automotive and industrial markets together with macroeconomic uncertainties which create meaningful risk to delivery of Bodycote’s medium term financial targets”.
In other words, everything is going splendidly apart from a couple of risks – the sectoral one that the strategy is addressing, and the vague “macroeconomic uncertainty” that is a normal state of affairs for most companies. As a reason for accepting a bid at a mere 25% premium, it’s not terribly convincing.
In Bodycote’s defence, one might say the takeover price could yet improve if CVC, which said it was considering its position, comes back. More depressingly, one suspects Bodycote simply lives in that unloved sub-£5bn capitalisation part of the stock market that suffers from lack of attention and lack of regular inward capital flows. It is harder to fight for independence if the unspoken market pressure is to accept a bid for the sake of certainty.
The mini-tragedy in this case is that there was a wake-up call of sorts for investors when Apollo, yet another US private equity outfit, expressed an interest in bidding at 885p in the spring before walking away. The net result, though, is that Bodycote’s 54 years of London stock market life will come to an end one way or another. The company joins a long list of departees this year, which on Tuesday alone also took in telecoms company Gamma Communications for £1.1bn and the Scottish energy firm Capricorn for £292m.
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Bodycote can still prosper under private equity ownership, of course. But a leading UK-based global specialist in its field, with 130 sites across 22 countries and 4,000 employees, is yet another bad one for the London market to lose.
The remedies for this rate of exodus have been trawled over in this column many times – and none are easy. But the process surely starts with recognition among politicians that “selling the family silver” – the title of a recent Peel Hunt report that calculated 150-plus bids for UK companies with a market value of more than £100m since the start of 2023 – may not be in the UK’s long-term economic interests. As ever, there was barely a squeak out of Westminster.
