The UK stock exchange faces another major setback after Ashtead announced its intention to move to New York its primary listing. Ashtead is a prominent member in the FTSE 100, and one of London’s most valuable listed firms.
Ashtead is now one of many major corporations that are looking for higher valuations and a wider investor pool across the Atlantic. This decision will further challenge London’s status as a global financial centre.
Ashtead is a global leader in the construction equipment rental industry with a market cap of PS28 billion. Its Sunbelt Rentals division generates almost all its profits in North America.
The board of the company concluded that the US is a “natural long term listing venue” because it dominates the firm’s revenue streams and operational footprint. Investor interest was also high.
Brendan Horgan, Ashtead’s CEO, said that a New York IPO would increase Ashtead’s liquidity and make it more attractive to US institutional investors.
Ashtead intends to maintain a secondary listing at the London Stock Exchange.
The move will result in it losing its place on the FTSE 100 index, which is synonymous with Britain’s corporate elite.
UK companies flock to US exchanges
Ashtead’s pursuit of an American listing is not unique.
In the last few years, a number of high-profile UK firms have moved their primary listing to the US.
Flutter Entertainment, owner of Paddy Power, has moved its primary listing from London to New York in a dual listing designed to boost its presence in the US.
CRH, building materials giant, relocated its listing in the first half of this year, citing value advantages.
The plumbing and heating group, Ferguson (formerly Wolseley), made the switch to the new name in 2022. Its valuation increased significantly as a result.
Shell CEO Wael Sawan stated in an interview with Bloomberg that the company is “open to all possible options” to reduce the valuation gap between Shell and US competitors Chevron and ExxonMobil.
He acknowledged that one of the possible scenarios was a shift in Shell’s primary listing to the US from London.
Sawan clarified in July that there were no immediate plans to relocate the company listing.
Shell instead focused on increasing shareholder value through stock buybacks. This strategy was designed to boost the company’s shares price while maintaining its existing listing base.
Aside from the UK, another European energy company TotalEnergies expressed interest in an eventual US listing. This was driven by the challenges of securing capital in Europe due to climate-change policies.
Exodus driven by valuation disparities
The US market’s allure is largely due to the significant valuation differences between companies listed in London versus those in New York.
JPMorgan Chase & Co.’s analysis shows that firms moving their listings to the US achieve higher valuations, and their discount gap with American counterparts narrows.
Since the move, CRH & Ferguson’s market valuations have aligned more closely with those US-listed competitors.
In the last three years, US listed companies have shown a robust financial performance with earnings increasing at an annualized 3.4%.
These companies’ revenues have increased even more, by 6.5% per year, highlighting the increased sales activity which has led to profit growth.
Numbers of companies trading on the London Stock Exchange from January 2015 until May 2024. Source: Statista
British listed companies, on the other hand, have experienced a difficult period. Earnings declined at an average annual rate of 9.5% over the same period.
The decline in earnings, despite modest revenue growth of 2.5% per annum, suggests that rising costs and increased reinvestment are eroding margins.
The US stock market has a price to earnings (PE) ratio that is 33.3x. This is significantly higher than its three-year PE average of 27.1x. Meanwhile, the UK stock exchange is trading with a PE of 20x. This is significantly higher than its three-year PE average of 14.5x but still lags behind the US.
This valuation gap has put pressure on UK listed companies to explore other markets that better reflect the true value of their company.
US appeal: A thriving equity ecosystem
Another important factor is the robust growth of US equity markets.
The NYSE and Nasdaq offer access to a large pool of capital, and they cater to industries with high growth rates like technology and artificial intelligent.
This dynamic ecosystem offers both long-term value and speculative trading opportunities, appealing to a wide range of investors.
US markets are also more attractive due to short-selling, increased trading volumes and a culture that encourages innovation.
The UK market’s preference of long-term investment has sometimes resulted slower growth and lower returns.
The FTSE 100 historically has shown resilience in times of economic turmoil.
Its performance over the last five years – up just 13%, compared to Dow Jones’ 58% gain – highlights its growing struggles.
Jack Kessler is a columnist for the Evening Standard. He noted that US markets were “simply more lucrative”, making it harder for UK companies resist the switch.
This trend raises concerns about the UK’s long-term viability as a destination for foreign businesses.
What role has Brexit played?
Brexit has also played an important role in reducing the UK’s appeal to listing destinations.
The uncertainty surrounding the UK’s departure from the EU has discouraged foreign investors and encouraged businesses with strong European operations, to consider other markets.
The UK government and regulators tried to stem the tide by reforming the LSE.
The Financial Conduct Authority (FCA), which is the UK’s regulator of financial services, has simplified listing requirements in order to make London more competitive.
The “Edinburgh Reforms” launched in 2020 aimed to modernize the financial sector.
Critics argue that these measures are yet to produce significant results.
What are the possible solutions to keep listings in UK?
Dr. Rama Prasad Kanungo, of UCL Global Business School for Health, has outlined a number of strategic reforms that will enhance the competitiveness of London Stock Exchange (LSE).
One of the most important suggestions is to implement mechanisms for trading multiple shares classes. This practice is common in the US and allows founders of companies to retain control of their company while raising capital.
The UK market, on the other hand, has been slow to adopt these structures, which could limit its appeal to innovators and founder-led companies.
Dr. Kanungo recommends that the LSE revisit the treatment of delisted stocks, suggesting that these shares be transitioned to over-the counter trading, similar provisions offered by NYSE and Nasdaq.
This approach would increase flexibility and reduce transaction cost for investors.
He also stresses the need to simplify administrative processes and address pay disparities in the UK and US.
In the UK, shareholders have a greater influence on executive compensation than their US counterparts, who rely more on advisory functions.
By addressing these issues, LSE could attract and retain global companies while increasing its competitiveness in comparison to rival exchanges.
This post What’s the reason UK-listed companies are moving to the US from Ashtead? This post may be updated as new information becomes available
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