Financial Times: M&A and buy-backs shrink the London market by £64bn

EXTRACT: Other significant buy-backs included BP (£8.4bn), Royal Dutch Shell (£2.9bn), AstraZeneca (£2.2bn) and Anglo American (£2bn).

By Robert Orr
Published: March 10 2007 02:00 | Last updated: March 10 2007 02:00

The UK equity market shrank by a record £64bn last year amid a surge in mergers and acquisitions and share buy-backs.

That figure is the equivalent to 4.1 per cent of the London equity market – double the rate of “de-equitisation” of 2005 and four times the figure for 2004.

Until recently, the pool of equity had tended to deepen over time as stock from new issues exceed the amount of being taken out of circulation.

However, this trend reversed three years ago and has accelerated since as a surge in cash takeovers has removed a host of quoted entities from the stockmarket.

The increasing use of financial engineering to gear up company balance sheets has also seen billions of pounds returned to shareholders via share buy-backs and special dividends.

Research from Citigroup showed that while almost £50bn of new equity was introduced to the UK market through initial public offerings and secondary issues last year, a record £115bn was “retired”.

Cash takeovers accounted for about £60bn of this, a rise of 80 per cent on 2005.

Takeovers completed last year included O{2,} the mobile phone company; BAA, the airports operator; BOC, an industrial gases group; and P&O, the ports and ferries company.

A further £56bn was taken out of circulation via share-buy-backs and the payment of special dividends. Redemptions of B shares by Vodafone retired £8.8bn last year. Other significant buy-backs included BP (£8.4bn), Royal Dutch Shell (£2.9bn), AstraZeneca (£2.2bn) and Anglo American (£2bn).

Hasan Tevfik, Citigroup strategist, said M&A would continue to drive de-equitisation as long as debt remained cheap in relation to equity.

He said: “It makes sense to use the bond market to invest in the equitiesmarket.

“The financing is much cheaper than the likely return on the equity [and] as long as the cost of capital remains low it is a positive environment for de-equitisation.”

Although de-equitisation is a global phenomenon, the UK markets has been more affected than others.

The 4.1 per cent figure for the UK is more than double the equivalent for the US and four times that of Europe.

Copyright The Financial Times Limited 2007

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