The takeover tailwind in UK equities

^{Source: Fidelity International, Refinitiv, 31 July 2025. Completed deals refers to acquisitions as at 31 July 2025, including completed deals such as H&T Group, as well as announcements that have received board recommendations or are subject to regulatory approvals, Just Group, Alpha Group, Bakkavor and Warehouse REIT*. Note multiple bids by the same company will only count for one each per year. There may be multiple bids for a holding if more than one company engaged in a bid.}

Benefits of an undervalued market

Mergers and acquisitions (M&A) have largely accelerated in the UK compared to the rest of the world. Since 2023, the value of deals has surged 120% year-on-year in the UK to the end of 2024, outpacing the European average growth of 16%³. But the increase in activity for the UK market began in 2021 and has maintained its pace since.

Investing in an undervalued market presents opportunities. Given their vantage point, the domestic market often doesn’t appreciate the hidden value, while other participants can, helping to close the valuation gap. Company executives, other corporates, and private equity, can capitalise on these low valuations through share buybacks, asset purchases or outright takeovers, taking a longer-term investment view.

The UK remains a preferred destination for US investors, given the highly international nature of UK companies. This year, 14.7% of takeover activity was from US acquirers, the highest level in three years⁴. Many domestic companies trade at substantial valuation discounts compared with their US and global peers. This valuation gap has not gone unnoticed as overseas investors recognise the attractive prices on offer and the synergies available. Takeover activity can anchor on US valuations, particularly from private equity companies, offering a significant premium. However, we have started to see regional valuations narrow slightly this year following strong YTD performance from the UK market.

Is this level of activity sustainable?

Takeover activity and shareholder activism have long been important features of the UK equity market, acting as a corporate governance tool that helps unlock shareholder value in companies.

However, rising company bids, a slowdown in UK IPOs and companies opting for US listings, have raised fears among some market participants of a shrinking UK equity market.

We feel these concerns are overdone. It wasn’t long ago that the UK enjoyed a strong wave of IPOs in 2020 and 2021. While some high-profile companies have switched exchanges, they are relatively few. We would have to experience several consecutive years of high takeover activity with very few new listings to raise legitimate concerns. And these issues are not unique to the UK. Equity markets outside of the US face similar challenges, largely because US stocks trade at substantial premiums compared to the rest of the world.

For us, the UK offers an attractive and deep investable universe – offering plenty of choice and investment opportunities.

Feature of our investment approach

Our contrarian-value approach focuses on finding unloved companies with the potential for positive change. We firstly evaluate the downside protection of a company, before considering its future prospects over a three-to-five-year view. While the investment thesis is not predicated around a takeover, it can be a secondary effect from our investment approach. This is due to our structural bias towards investing in undervalued medium and smaller sized companies, where the level of M&A activity is higher.

As a company navigates through its positive change journey, we conduct extensive due diligence and closely monitor developments with help from Fidelity’s extensive analyst team. We generally find that our contrarian ideas typically re-rate as positive developments in the company excite the market and more investors buy into the story. However, occasionally the route is a takeover, which can unlock the shareholder value first. While not every takeover bid is what we consider fair value, the majority of deals have offered attractive premiums, and our process recycles this capital into new ideas.

Property spotlight

Until recently, property is an industry that we have largely underinvested in given tight yields and an oversupply of office spaces following the rise in working from home. However, this has started to unwind, and we’ve selectively increased our exposure to areas with higher yields and rising rental growth, which offer attractive total returns and trade at significant discounts to their net asset values. For example, in student, industrial and office categories. We favour smaller companies given the potential for economies of scale from consolidation.

Although real estate only accounts for a small portion of the index, it has been the third largest industry for M&A activity this year⁵. Within the fund, our holding in WareHouse REIT, which invest in large logistic warehouses, has received bids from US private equity company Blackstone and peer Tritax Big Box. Another holding in the fund, Empiric Student Property, is in takeover discussions with larger rival Unite Group. Conversely, the position in NewRiver REIT is benefitting from its acquisition of Capital & Regional last year, strengthening its retail asset portfolio. We continue to find the property sector a rich source of contrarian investment opportunities.

^{Source: Fidelity International, ICB sector breakdown of the FTSE All Share Index, data as at 31 July 2025}

Active M&A market reflects compelling value

The surge in bid activity underscores the inherent value and investment opportunities available in the UK market. There are numerous overlooked companies across the market cap spectrum and the fund continues to trade at an attractive discount to the broader market.

Our contrarian investment approach should continue to benefit from an active takeover market. While this level of M&A activity won’t always remain this high, we are excited that our holdings have this additional channel to unlock value.

^{1 Completed deals refers to acquisitions as at 31 July 2025, including completed deals such as H&T Group, as well as announcements that have received board recommendations or are subject to regulatory approvals, Just Group, Alpha Group, Bakkavor and Warehouse REIT.
2 Multiple bids by the same company will only count for one each per year. There may be multiple bids for a fund holding if more than one company engaged in a bid.
 3 Data from Refinitiv and analysis by BCG as at 8 January 2025, for more details visit M&A Outlook 2025: Expectations Are High | BCG.
4 Fidelity International, Refinitiv, includes London and AIM listed companies. M&A activity includes completed, pending, intended, unconditional and withdrawn deals.
5 Fidelity International, Refinitiv, includes London and AIM listed companies. M&A activity includes completed, pending, intended, unconditional and withdrawn deals.}