UK companies eye US listings
Questions are being asked about the attractiveness of London after several UK-listed companies announced they plan to list their shares in the US, including gambling giant Flutter Entertainment, building materials group CRH and software outfit WANdisco.
The capital has also been dealt a blow by news that British semiconductor behemoth Arm has shunned London and chosen the US as the destination for its upcoming blockbuster IPO.
So, why are these companies opting for the US – and should the London Stock Exchange be worried?
UK stocks: Why are they opting for US listings?
There are multiple reasons why a number of UK companies are looking to list in the US.
Firstly, it makes sense to list where you do the bulk of your business. CRH generates over three-quarters of its sales across the Americas while WANdisco makes about 68% of its revenue from North America. Meanwhile, Flutter’s rapid expansion in the US means it now generates more revenue from there than anywhere else – and it is also the fastest-growing part of its business.
‘If companies are going to make decisions when most of their business in the US, that sort of is what it is,’ said the CEO of the London Stock Exchange Group, David Schwimmer, when asked about CRH’s decision last week.
This is not the first time that companies have sought additional listings because they make their money in the US. For example, plumbing giant Ferguson move its primary listing to the New York Stock Exchange in 2022 after a spree of acquisitions meant the bulk of its revenue came from North America, leaving it today with a secondary listing in London.
Secondly, valuations are a key factor. UBS said CRH could experience a ‘multiple re-rating’ considering its peers in the US trade at a price to earnings ratio of around 25x, whereas CRH currently trades closer to 14x. Analysts have also said that Flutter is also expected to demand a premium valuation over its US rivals.
Thirdly, companies will be well aware that the UK stock market has long underperformed that of the US. For example, the FTSE 100 is up less than 10% over the past five years while the S&P 500 is up over 45%. Meanwhile, the FTSE 250 has actually lost ground during that timeframe.
Meanwhile, liquidity is just a fraction of what it used to be. For example, LSEG’s boss Schwimmer has conceded that the amount of investment being made in domestic stocks by UK pension funds has ‘dropped dramatically’ in the last 20 years and funneled elsewhere. UK stocks make up less than 5% of UK pension fund portfolios today compared to around half two decades ago, showing that even UK investors are shunning the market and see better opportunities abroad. Ferguson has already proven that you can attract far more liquidity by switching to the US, having seen average daily trading volumes surge higher since switching its primary listing.
Fourthly, the difference in regulation could also be a consideration for some, especially those yet to list. Softbank, the Japanese conglomerate that currently owns Arm, is thought to have picked the US because of burdensome rules in the UK. An unnamed senior government insider told the Financial Times that the Financial Conduct’s Authority’s requirement for listed companies to gain investor approval for all related party transactions had turned Softbank off. In the US, companies only need to report these transactions without the need of securing approval. The FT said Softbank had also been discouraged by the complexity and costs associated with maintaining a London listing as factors.
The lack of a chip industry in the UK will also not have helped, especially as the US has recently launched a new semiconductor strategy with tens of billions of dollars up for grabs in subsidies. The US remains far more attractive to technology companies considering the UK has failed to nurture its own sector, with the country boasting only a handful of sizeable tech stocks on its exchanges.
That brings us on to the fifth reason. While the US is underpinning its economic growth plans with huge programmes that will funnel significant sums into technology and infrastructure, the UK remains the only G7 economy that is smaller today than it was before the pandemic and is forecast to be the only one that will contract in 2023, according to both the IMF and the OECD. Ultimately, the US economy is powering ahead and remains more attractive while the UK struggles to keep up.
Will more UK stocks jump ship?
There are other companies at risk of jumping ship and heading to the US. There have been reports that oil giant Shell – which has the single biggest weighting in the FTSE 100 at 8.6% - has considered moving the company to the US. There are also other companies where a US listing makes sense, such as equipment rental giant Ashtead, which makes over 80% of its money from the US.
London is also losing big names through foreign takeovers, which have seen the likes of industrial software maker AVEVA, cybersecurity firm Avast and enterprise software outfit Micro Focus stripped out of the London Stock Exchange in recent years, strangling the UK’s tech sector even further. It isn’t just the tech sector either considering London has also lost the likes of supermarket Morrisons, defence giant Meggitt and outsourcer G4S to foreign buyers. The slump in sterling and lacklustre valuations in some areas is only enticing more overseas buyers to the UK as they look to get more bang for their buck.
Should London be worried?
London does appear to be having problems with attracting and retaining businesses. This is not a new trend, but there are signs that more companies see better opportunities elsewhere in the current environment. Right now, the US boasts deeper pools of capital and liquidity, higher valuations, less complex and onerous regulations, a starkly better stock market performance and more clarity on the economy than the UK.
Losing existing companies while struggling to attract new ones could be a lethal combination over time. In fact, the number of companies trading on the London Stock Exchange has plummeted from over 2,400 at the start of 2015 to below 2,000 today, according to Statista.
The situation leaves the UK geared toward more old-fashioned stocks such as banks and natural resources whilst other exchanges are successfully attracting high-growth companies. That could put London at a disadvantage over the long-term.
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