Get ready for the Great British Fire Sales

Regardless of the cheap stock markets, the UK somehow managed to stay one step ahead. After a weak market opened in Europe on Friday, an unexpectedly generous stimulus package hit the pound, British government bonds and UK-focused stocks. Amid the wreckage, there will be opportunities for strategic buyers. Thanks to Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Quarting, the “UK is Cheap” narrative has gained another side.

Currency and bond markets have gripped fears that policies designed to ease the cost-of-living crisis will only fuel inflation and raise interest rates while burdening the UK with a heavy debt burden. In an environment of sharply rising borrowing costs, debt-laden British stocks have suffered particularly badly – such as commercial property firms and sports car maker Aston Martin Lagonda Global Holdings plc.

The FTSE-100 index is now trading on a forward rate of return of only 8.6. The FTSE-250 index of medium-sized companies (with faster growth expected) is 10 times, slightly lower than European stocks but very shy of the S&P 500 index 16 times.

Investors in British assets have a lot to digest. The outlook for companies focused on domestic activities is particularly bleak. But selling on a large scale may attract the attention of acquirers who are looking for more internationally exposed companies caught up in the whirlpool of the storm. Not now, but in time. Even before sterling got this low, foreign companies and takeover bidders were taking advantage of the relative strength of the dollar to pounce on London-listed companies with clear exposure outside the UK and lasting business models, particularly in the engineering sector.

This week saw billionaire Xavier Niel buy telecom operator Vodafone Group Plc. France’s Schneider Electric SE has agreed to the terms of its long-awaited bid to take full control of software company Aveva Group Plc — an apparent opportunistic move given the weak target share price. These may be specific positions, but they still reinforce the trend.

There is some brake on all of this. First, bidders will now wonder if the currency weakness is an overshoot or a trend with more runs. Regardless of the UK valuation pulls, the non-financial uncertainty facing acquirers is growing. This may be a government that embraces free markets but it inherits a new system of national security that is designed to subject many transactions to automatic scrutiny.

The UK competition authorities appear determined to establish themselves as the world leader in antitrust enforcement. Add to that the fact that their review process is time-consuming, and aspiring buyers may wonder if the move is worth the risk. There is also the possibility that if the gear maneuver fails, the government changes again. She doesn’t have five years ahead of her like a prime minister voted by the electorate.

But there will be situations where stars are aligned with bidders with strong balance sheets able to exploit all of this – the UK buyout target trades relatively cheaper than its international peers, where the antitrust and national security risks are worse for competing competitors and where they are. It is possible to have some confidence in the company’s long-term profit outlook. Reportedly, some of Aviva’s stockholders are backing away from Schneider’s bid, which landed when the target looked particularly vulnerable. Many persecuted contributors to the UK market may need to find their backbone if other opportunists pounce.

More from Bloomberg Opinion:

• Quarting’s mini-budget creates a devastating battle between the Treasury and the Bank of England: Mark Gilbert

Britain Going Wrong With Energy Saving: Javier Blas

Is Kwasi Karting Ready to Save the British Economy?: Adrian Wooldridge

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

Chris Hughes is a columnist for Bloomberg Opinion covering deals. Previously he worked for Reuters Breaking Views, Financial Times and The Independent.

More stories like this are available at bloomberg.com/opinion

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