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On 20 July 2020, M&G Investment Management, part of the FTSE 100 M&G group, on behalf of one of its funds that it had made several approaches to the board of UK Mortgages, for a cash offer of 67 pence per UKML share, the latest being on 15 July.  The board of UKML have rejected all M&G’s approaches so far and have declined to enter into further discussion which may lead to a firm offer.

The latest approach values UKML at £183 million, representing a 21% premium on its closing price as of 17 July 2020, and a 36% premium on the 3 month volume weighted average price. UKML shareholders would also be entitled to a 0.375 pence per share dividend under the proposal. Despite the lack of cooperation from the UKML board, M&G believe the deal is ‘highly attractive and in the best interests of all UKML shareholders’.  The bid was made public, to allow shareholders to see the merits of the possible offer and spark a dialogue with them.

M&G noted the ‘significant headwinds’ that the UKML is faced with, proposing that the possible offer would allow UKML shareholders an immediate exit, despite the illiquidity of UKML’s shares. M&G stated:

‘The volatility in the residential mortgage backed security markets and the deteriorating macroeconomic impact on asset quality are expected to continue to put pressure on the Company's long-term performance. MAGIM also believes that the impact of widening credit spreads and the weakening performance of UKML's underlying assets is not reflected in the Company's reported monthly NAV, given the accounting basis on which it is calculated, which makes it an inaccurate representation of the Company's true value.’

The fund manager further went on to state that, ‘given the continued uncertain outlook for the underlying assets in which UKML is invested, the sustained low level of returns of the Company and its structure as a listed investment company, UKML is unlikely to achieve an equivalent valuation for its shareholders and that an all cash offer at this level would provide UKML shareholders’.

UKML to the possible offer on 22 July 2020, confirming that having reviewed the offer, it was unanimously rejected on 19 July. UKML has confirmed it has received no further proposals since and is not in discussion with M&G at this time.

M&G had highlighted the company’s consistent struggle to deliver on dividends and returns, noting that the dividend had been cut to 0.375 pence per share for the third and fourth quarter of 2020, falling below the UKML’s already reduced minimum dividend target of 1.125 pence per share, per quarter announced in June 2019. However, UKML stated in its response that whilst it had reduced its quarterly dividend in anticipation of the government’s s COVID-19 mortgage payment holiday scheme, the previous level of 1.125 pence was to be restored when the period of market dislocation had settled. UKML confirmed that it reinstated the previous dividend policy after being advised that ‘the first cohort of mortgage payment holidays is now coming to an end and indications are that significant numbers of borrowers are recommencing payments’. The company also announced its intention to declare an additional interim dividend of 1.5 pence per share alongside the quarterly dividends of 1.125 pence per share.

The additional dividend payment impacts one of M&G’s conditions to the offer, stating that M&G reserve the right to reduce the offer in the event that the UKML board pays a dividend or any other distribution or return of capital to its shareholders. In this case M&G reserve the right to reduce the offer price by the amount payable.

UKML has urged shareholders to take no further action.

Market Tracker will continue to monitor this transaction as it develops.