The UK stock market faces another significant setback as Ashtead, a prominent member of the FTSE 100 and one of London’s most valuable listed companies, announces its intention to move its primary listing to New York.
With this decision, Ashtead has joined the list of some major corporations seeking higher valuations and deeper investor pools across the Atlantic, further challenging London’s position as a global financial hub.
Ashtead, a global leader in construction equipment rental with a market capitalization of £28 billion, generates nearly all its profits in North America through its Sunbelt Rentals brand.
The company’s board concluded that the US offers a “natural long-term listing venue” due to its dominance in the firm’s revenue streams, operational footprint, and investor interest.
CEO Brendan Horgan emphasized that a New York listing would enhance liquidity and make Ashtead more appealing to US institutional investors.
Despite this shift, Ashtead plans to maintain a secondary listing on the London Stock Exchange (LSE).
However, the move means it will lose its place in the FTSE 100, an index synonymous with Britain’s corporate elite.
UK companies flock to US exchanges
Ashtead is not alone in its pursuit of a US listing.
Over the past few years, several high-profile UK companies have shifted their primary listings to the US or are actively considering the move:
Flutter Entertainment, the owner of Paddy Power has moved its primary listing to New York, in a dual listing aimed at boosting its presence in the US market.
CRH, the building materials giant relocated its listing earlier this year, citing valuation advantages.
Ferguson (formerly Wolseley), the plumbing and heating group made the switch in 2022, with a notable boost in valuation following the move.
In an April interview with Bloomberg, Shell CEO Wael Sawan indicated that the company was “open to all options” to address the valuation disparity between Shell and its US competitors, Chevron and ExxonMobil.
Among the possibilities, he acknowledged a potential shift of Shell’s primary listing from London to the US
By July, however, Sawan clarified that no immediate plans were underway to relocate the company’s listing.
Instead, Shell’s focus was on enhancing shareholder value by increasing stock buybacks, a strategy aimed at boosting the company’s share price while maintaining its current listing base.
Outside of UK, another European energy giant TotalEnergies has expressed interest in a potential US listing, driven by challenges in securing capital within Europe due to climate change policies.
Valuation disparities drive the exodus
The allure of US markets is largely tied to significant valuation disparities between companies listed in London and those in New York.
Analysis by JPMorgan Chase & Co. reveals that firms shifting their listings to the US often achieve higher valuations and narrow their discount gap with American peers.
For instance, CRH and Ferguson have seen their market valuations align more closely with those of US-listed competitors since making the move.
Over the past three years, US-listed companies have demonstrated robust financial performance, with earnings growing at an annualized rate of 3.4%.
Revenues for these companies have risen even more significantly, at 6.5% annually, highlighting increased sales activity that has driven profit growth.
Number of companies trading monthly on the London Stock Exchange (LSE) from January 2015 to May 2024, Source: Statista
In contrast, British-listed companies have faced a challenging period, with earnings declining at an average rate of 9.5% annually over the same timeframe.
While revenues have grown modestly at 2.5% per year, the decline in earnings suggests that rising costs or heightened reinvestment levels are eroding profit margins.
Significantly, the US stock market is trading at a price-to-earnings (PE) ratio of 33.3x, notably above its three-year average PE of 27.1x, while the UK stock market is trading at a PE ratio of 20.1x, significantly above its three-year average of 14.5x, but widely lagging behind the US.
This valuation gap has placed pressure on UK-listed companies to explore alternative markets that better reflect their true worth.
US appeal: a thriving equity ecosystem
The robust growth of the US equity market is another significant pull factor.
The NYSE and Nasdaq provide access to a vast pool of capital and cater to high-growth industries like technology and artificial intelligence.
This dynamic ecosystem offers opportunities for both long-term value creation and speculative trading, appealing to a broad spectrum of investors.
Short-selling activity, higher trading volumes, and a culture of innovation have also made US markets more attractive.
In contrast, the UK market’s preference for long-term investment strategies has sometimes resulted in slower growth and lower returns.
Historically, the FTSE 100 has provided resilience during economic turbulence.
However, its performance over the past five years—up just 13% compared to the Dow Jones’ 58% gain—highlights its growing struggles.
Jack Kessler, a columnist at the Evening Standard, noted that US markets are “simply so much more lucrative,” making it increasingly difficult for UK companies to resist the switch.
The trend also raises questions about the long-term viability of the UK as a destination for international businesses.
How has Brexit played a role?
Brexit has also played a role in diminishing the UK’s appeal as a listing destination.
The political and economic uncertainty surrounding the UK’s exit from the EU has deterred foreign investors and encouraged companies with strong European operations to consider alternative markets.
The UK government and regulators have attempted to stem the tide of departing companies with reforms aimed at revitalizing the LSE.
The Financial Conduct Authority (FCA) introduced its most extensive overhaul of listing rules in decades earlier this year, simplifying requirements to make London more competitive.
Additionally, the “Edinburgh reforms” launched in 2022 sought to modernize the financial services sector.
However, critics argue that these measures have yet to yield significant results.
What could be the potential solutions to retain listings in UK?
Dr. Rama Prasad Kanungo of UCL Global Business School for Health has outlined several strategic reforms to bolster the competitiveness of the London Stock Exchange (LSE).
One critical suggestion is implementing mechanisms for trading multiple classes of shares, a practice prevalent in the US that allows founders to maintain control of their companies while still raising capital.
In contrast, the UK market has been slow to adopt such structures, potentially limiting its appeal to innovative and founder-led businesses.
Dr. Kanungo also recommends revisiting the treatment of delisted shares, proposing that the LSE introduce options for these shares to transition to over-the-counter trading, similar to provisions offered by the NYSE and Nasdaq.
This approach would enhance flexibility and reduce transaction costs for investors.
Moreover, he emphasizes the need to simplify administrative procedures and address pay disparities between UK and US executives.
In the UK, shareholders play a decisive role in executive remuneration, compared to the advisory function of their US counterparts.
Addressing these issues could help LSE attract and retain global firms while enhancing its competitiveness against rival exchanges.
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