The travails of the London Stock Exchange (LSE) have made big headlines over the past year, as London continues to endure a stream of de-listings and prominent IPO snubs.
In February, Tui became the latest big name to ditch its LSE listing. This came hard on the heels of Smurfit Kappa switching its primary listing from London to New York. Meanwhile, Arm disregarded London last autumn, preferring to list on New York’s Nasdaq instead, and Glencore announced that it would list its planned coal-mining spin-off in New York rather than London.
Imminent changes to listing rules will enhance the appeal of the UK’s capital markets
To explain this delisting crisis, commentators have blamed everything, from Brexit and acute competition from other international exchanges, to over-representation of the old economy rather than tech, and political instability. The short termism of the London market and calls for its reform could also be partly to blame.
Stemming the flow
In January, the UK’s Chartered Governance Institute (CGI), which represents 10,000 governance professionals, wrote a letter to City minister Bim Afolami stating that, without swift action, the LSE was in danger of losing ‘critical mass’ in key sectors this year. It urged the Treasury to convene an emergency meeting of leading City institutions in an attempt to stem the flood of companies choosing to move away from London’s public markets.
Multiple regulatory projects are reportedly in the pipeline, designed to make the UK more attractive for companies to list, including imminent changes to listing rules that will enhance the appeal of the UK’s capital markets. To achieve them, government reviews and consultations are reported to be seeking agreement on the detail of listing rule reform.
Foreign bidders or private equity firms have stepped in with tempting offers
Efforts to make the LSE more appealing have been spearheaded by the Financial Conduct Authority, which published final proposals for market reform last December. Headline changes include merging the standard and premium segments of the market and scrapping the requirement for firms to get shareholder approval for major deals.
Private allure
But all of this activity has done little to diminish the growing list of British companies being taken out of the LSE by foreign bidders or private equity firms, which have stepped in with tempting offers that they simply cannot refuse. The pace of de-equitisation is relentless. Just last month, Spirent Communications, which floated on the London market in 1955, accepted a £1bn takeover offer from a US buyer.
At the same time, private equity firm Pollen Street Capital acquired Mattioli Woods, which pointed to the problems of the public markets, stating that it ‘recognises the opportunities that can be delivered under private ownership…with the support of a growth-focused shareholder’.
Mattioli Woods added that going private provides ‘the flexibility to take longer term decisions to maximise the growth potential of the business’.
Since 2007, Germany has shed more than 40% of its listed companies
Some commentators might suggest that this is why so few big companies want to list on the LSE and a steady number are continuing to leave. Others will argue that these transactions simply represent part of a long-term trend.
In 1996, there were more than 2,700 companies listed on the main market of the London Stock Exchange. By the end of 2022 their number had fallen by 60%. The UK is also part of a global trend: since 2007, Germany has shed more than 40% of its listed companies, while the US has experienced a similar 40% drop since 1996.
Audit insecurity
The UK’s corporate governance regime is certainly another key factor that affects the thinking of multinational boards. The Department for Business, Energy and Industrial Strategy originally conceived an overhaul of the regime to restore public trust in how big companies are managed and scrutinised. Following several high-profile corporate collapses and concerns over their audit quality – including BHS in 2016 and Carillion in 2018 – the government wanted to legislate to ensure that the UK’s largest corporate entities are governed responsibly.
After years of delay and obfuscation, long-awaited reforms to audit rules were eventually shelved by the government. The Financial Reporting Council had announced significant measures to strengthen audit and reporting standards for listed companies, but these were omitted from the King’s speech last November, and were then dramatically weakened (see AB articles ‘Audit reform’s unfulfilled promises’ and ‘Bad time for reform row-back’).
Another letter that has recently emerged from the CGI – this time to Business and Trade Secretary Kemi Badenoch – claims that failing to implement the reforms in full has ‘undoubtedly contributed to the persistence of the delisting problem which plagues the London markets.’
The direction of travel seems to include more deregulation and taking advantage of freedoms
The letter continued: ‘The government’s capricious abandonment of the long-planned [reforms] represented a colossal waste of government time and public money, sent a bad signal about this government’s commitment to responsible capitalism, and left business leaders and investors in a state of uncertainty.’
The impact of such a downbeat message being made public does not reflect well on UK plc, nor does much to enhance the appeal of the LSE as a place to list.
The current direction of travel seems to include more deregulation and taking advantage of a combination of post-Brexit and post-MiFID II (the EU’s 2014 Markets in Financial Instruments Directive) freedoms, rather than to add to the cost and administrative burdens on listed entities.
We are on the cusp of a general election, which is almost certainly going to happen this year. The most likely outcome seems to be a Labour government. Quite where that new government will sit on deregulation and reform remains to be seen, but whatever their priorities, more consistency and greater certainty would undoubtedly be welcomed by the markets.
