Morrison Bid Battle Puts Cheap U.K. Stocks Under M&A Spotlight

(Bloomberg) -- The sudden flurry of private equity interest in Wm Morrison Supermarkets Plc has thrown the spotlight onto long-underperforming U.K. stocks, with investors trying to figure out who might be next in line for a takeover.

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British equities have lagged behind global peers since the 2016 Brexit referendum. The FTSE 250 Index trades at a forward 2022 price-earnings ratio of 16.1 times, compared with 20.4 times for the the S&P 500 and 18.9 times for the MSCI World Index, according to data compiled by Bloomberg.

For private equity firms, lowly valuations are likely just part of the attraction. Other characteristics they will be scrutinizing include free-cash flow yields and debt-to-Ebitda ratios, according to Canaccord's research division Quest, which highlights the retail and financial sectors as dominating its quantitative screening for potential public-to-private targets.

These sectors in particular show evidence of the U.K. market's undervaluation, “which is why they are so attractive to private equity,” analyst Graham Simpson wrote in an email.

Quest identifies retailers J Sainsbury Plc, Kingfisher Plc and Marks & Spencer Group Plc and builders' merchant Grafton Group Plc as possible bid candidates. The first two both rank “very high,” based on an “leveraged buyout free cash flow yield” metric, the researcher says.

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Here's a table highlighting U.K. stocks that may be of interest, based on their valuations, cash flow and fixed assets:

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