FTSE 250 bargain hunters have to tread carefully

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.There goes one other one. KKR’s £4.7bn buy this week of Spectris, a high-tech gear maker, is barely the most recent in a sequence of buyouts of UK mid-market corporations. Lowly valuations are attracting discount hunters. However traders wishing to take a punt on the following goal might want to choose very rigorously. KKR’s bid, at a hefty 96 per cent premium, pipped that of rival personal fairness rival Creation Worldwide to take out the fifth-largest group within the FTSE 250 and the index’s fourth greatest performer this 12 months. Different offers preceded it. In Might, Deliveroo succumbed to a £2.9bn bid from US meals supply peer DoorDash whereas shortly earlier than, comfort meals producer Bakkavor agreed to a takeover by native rival Greencore, for £1.2bn. In January automotive components group Dowlais accepted a £1.2bn provide from US peer American Axle. UK funding financial institution and FTSE 250 knowledgeable Peel Hunt this week hinted at extra to come back, saying it had a robust pipeline of offers, each introduced and at an earlier stage. So ought to traders go all in on a FTSE 250 tracker and skip the laborious work of guessing the following goal? That’s difficult for mid-cap gauges, which by their nature are inclined to include a mixture of corporations on the slide in addition to the following group of buyout store targets and world-beaters.Some back-of-the-spreadsheet sums can slim candidates, nonetheless. For simplicity, strip out closed-end funding funds and actual property funding trusts to concentrate on working corporations. Subsequent, take out these with gross sales falling by at the least 3 per cent up to now 12 months given that implies potential elementary issues with the enterprise. Buyers could disagree with this, or desire a greater hurdle, as these then eliminated embody each Dowlais and Spectris. Nonetheless, filter for leverage too: closely indebted teams are much less interesting. Slicing these with, say, web debt of greater than 2.5 instances ebitda reduces the candidates to lower than 90, together with Deliveroo and Bakkavor. Of that group, solely a 3rd are buying and selling at worth relative to earnings at or beneath the index a number of of 11, suggesting they’re certainly low-cost. Essentially the most expensive in the meantime — on-line reviewer Trustpilot and circuit maker and 2024 sizzling IPO Raspberry Pi at a punchy 71 and 35 instances subsequent years’ earnings respectively — would make it laborious for a purchaser to supply a considerable premium however that isn’t at all times a bar to high-price tech offers. Names in the course of the checklist as ranked by worth multiples embody Pets at House and IT {hardware} specialist Computacenter, on 13 instances every.Jitters concerning the UK financial system have weighed down on the FTSE 250 greater than the extra internationally centered FTSE 100. That has left the junior index buying and selling properly beneath its pre-pandemic common of about 15 instances ahead earnings. It’s simple sufficient to see the potential for discount searching, however traders must do some work to kind the offers from the duds. jennifer.hughes@ft.com