UK PLC on Sale

The Alarming Trend of Undervaluation and an Exodus from the London Stock Exchange 

The recent takeover of automotive engineering firm Dowlais Group by a US competitor starkly illustrates a worrying trend plaguing the UK stock market. Yet again, a British company has been acquired for what seems to be a bargain price, underscoring a persistent failure by UK investors to recognise the value inherent in their own domestic companies.  

This apathy is leaving UK PLC vulnerable to foreign takeovers and contributing to a steady decline in the number of companies listed on the London Stock Exchange. The Dowlais case should serve as a wake-up call for UK investors, for the government, for regulators and for the LSEG. 

The company, a spin-out from Melrose Industries, agreed to a takeover by American Axle & Manufacturing (AAM) in a deal announced at the end of January 2025. While the offer of 85.2 pence per share represented a 25% premium to the previous day’s closing price, it painted a more concerning picture when compared to the company’s net book value (NBV). 

In its 2024 Annual Report, Dowlais revealed that the implied equity value of the takeover, approximately £1.2 billion, was significantly lower than its Group net assets of £2.3 billion. This suggests the company was acquired at a discount of around 48% to its NBV.  

The sale price reflects an EV / EBITDA ratio of just 2x, and a P/E ratio of approximately 4.6x, as compared with 8x for Americal Axle and 10.5x for Valeo. 

The one saving grace is that the deal leaves existing shareholders with 49% of the combined entity, allowing them to benefit from $300m in anticipated annual synergies and to benefit from future upside.  

UK Stock Market Malaise 

The failure of UK markets to appreciate the value in companies like Dowlais has a chilling effect. It creates an environment where overseas buyers can swoop in and acquire British innovation, intellectual property, and market share on the cheap. This contributes to the hollowing out of the UK’s public markets. 

The data on company listings on the London Stock Exchange (LSE) paints a bleak picture. Both the main market and the Alternative Investment Market (AIM) have seen a consistent downward trend in the number of listed entities. 

The Main Market, home to the UK’s largest and most established companies, has been haemorrhaging constituents. In 2023, the market witnessed a net loss of 65 companies, with only 23 new listings compared to 88 delistings. This exodus is driven by a combination of factors, including the allure of higher valuations on other international exchanges, particularly in the US, and the increasing burden of regulation for publicly listed companies in the UK. 

The AIM market, designed to help smaller, growing companies access capital, is facing an even more acute crisis. The number of companies listed on AIM has plummeted from a peak of 1,694 in 2007 to just 679 in March 2025, its lowest level in over two decades. In the 12 months leading up to March 2025, the market shrank by a net 61 companies. This decline stifles the growth of the next generation of British businesses and limits investment opportunities for those seeking to back UK enterprise. 

 Several factors are contributing to this chronic undervaluation of UK equities: 

• Investor Sentiment: There is a prevailing pessimism among many UK investors towards their domestic market, partly fuelled by the economic and political uncertainty following Brexit. This has led to a flight of capital towards international markets, particularly the perceived glamour and high-growth prospects of US tech stocks. The many positive statements from the new Labour Government have yet to change the investor sentiment, and the market has not reacted well to NI increases, IHT changes, the failure to remove stamp duty on UK shares and the exit of many non-doms. 

• Structural Issues: The UK’s pension fund landscape has shifted focus from equities and towards bonds, reducing a significant source of domestic investment in UK companies. 

• Lack of Retail Investor Participation: While organisations like ShareSoc champion the cause of individual investors, overall retail participation in the UK stock market remains lower than in other developed economies. 

• A Focus on Dividends Over-Growth: The UK market has traditionally been favoured for its dividend-paying stocks. While this provides income, it can sometimes lead to an undervaluing of companies with strong long-term growth potential that reinvest their profits. 

A Call to Action for UK Investors 

The solution to this predicament lies, in large part, with UK investors themselves. It is imperative that we look again at the opportunities on our own doorstep. The significant discounts to book, as seen in the case of Dowlais, are not just a risk but also a potential opportunity for discerning investors. 

By actively seeking out and investing in undervalued UK companies, we can: 

• Drive a re-rating of the UK market: Increased demand for UK shares will naturally lead to higher valuations, making it more difficult for foreign predators to acquire British assets on the cheap. 

• Support UK businesses: Providing capital to UK companies allows them to invest, innovate and grow, creating jobs and strengthening the UK economy. 

• Generate strong returns: Investing in undervalued assets can contribute to long-term wealth creation.

The buy British message is clear, however, the timing of when it is best to buy is difficult if not impossible to get precisely right. 

Cliff Weight member of ShareSoc and ShareSoc Education and Policy Committees 

DISCLOSURE: I owned shares in Dowlais. 

This article reflects the opinions of its author and not necessarily those of ShareSoc.