FTSE Small Cap index ‘will cease to exist’ by 2028 as analysts predict a takeover ‘feeding frenzy’

A stock market index of small UK firms could be wiped out in four years in a takeover ‘feeding frenzy’, City analysts warn.

In a report that raised fresh concerns over the health of London as a financial centre, Peel Hunt said the FTSE Small Cap will cease to exist in 2028 if the ‘relentless’ pace of merger and acquisition (M&A) activity continues.

The index – which is made up of companies on the UK main market that are not big enough to be in the FTSE 100 or FTSE 250 – has seen its numbers drop from 160 in 2018 to 114 last year.

‘If we extrapolate the current trend line, then the last company will leave the FTSE Small Cap in 2028,’ the report said. 

Peel Hunt noted that 12 takeovers of London-listed firms worth more than £100million were announced in the first three months of this year alone.

Takeover threat: Peel Hunt said the FTSE Small Cap will cease to exist in four years if the ‘relentless’ pace of merger and acquisition activity continues

The proposed deals include a £5.7billion bid for packaging group DS Smith, the £2.9billion takeover of Virgin Money by Nationwide, the £2.5billion acquisition of Redrow by Barratt Developments, and the £762million purchase of haulier Wincanton by a US rival.

Other approaches for British companies have been rejected including overseas attempts to buy Currys and Direct Line.

A sharp drop in the number of firms looking to list their shares in the UK means that those that are bought are not replaced. 

And some London-listed companies are jumping ship even without a takeover, including CRH and Ferguson, which moved their shares to New York, and Tui, which opted for Frankfurt.

Paddy Power owner Flutter is moving its primary listing to New York next month.

With a shortage of companies joining the stock market through initial public offerings (IPOs) – such as the high-profile snub by Cambridge-based chip designer Arm which listed in New York – numbers are dwindling.

Warning that the UK is ‘not refilling the hopper’, Peel Hunt head of research Charles Hall said: ‘There has been minimal IPO activity for the past two years. 

‘This needs to be actively addressed as the FTSE Small Cap will cease to exist by 2028 at the current run-rate.

‘The pace of de-equitisation is relentless and will inevitably continue given the low valuation accorded to UK companies.’

He said ‘the impact of the scale of de-equitisation can be seen in the FTSE Small Cap sector’ as opposed to the FTSE 100 or FTSE 250 because these always contain the 350 biggest companies listed in London.

While the number of firms in the Small Cap dropped, the total value of its constituents has also fallen from close to £60billion in 2018 to around £30billion today.

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