North Sea M&A activity ramps up after Budget

Oil companies are continuing to roll up assets in the North Sea in an effort to cut down tax bills and keep fields in the black. This week, Harbour Energy (HBR) and Serica Energy (SQZ) bought up stakes in the UK continental shelf, while earlier in the month French giant TotalEnergies (FR:TTE) combined its North Sea assets with those jointly owned by Repsol (ES:REP) and private equity vehicle HitecVision.

Harbour’s $170mn (£127mn) deal included 40 per cent of the Catcher field, taking its stake to 90 per cent, and 29.5 per cent of the Kraken field, operated by EnQuest (ENQ). The added exposure comes as a surprise after Harbour very publicly shifted investment out of the UK over what it has said were onerous fiscal conditions. The seller was Waldorf International, a private company in administration.

“This transaction is an important step for Harbour in the UK North Sea, building on the action we have already taken to sustain our position in the basin given the ongoing fiscal and regulatory challenges,” said Scott Barr, managing director of Harbour’s UK business unit.

Serica Energy, on the other hand, has continually looked to expand its North Sea holdings in what it says is a buyer’s market.

The latest deal will see it take a set of North Sea holdings from Centrica (CNA) subsidiary Spirit Energy for £57mn. This includes various stakes in 10 fields, adding a total of 10,000 barrels of oil equivalent per day (boepd) to Serica’s portfolio for 2026, mostly through gas production, an increase of around 20 per cent on current output. Serica also closed the Prax Upstream acquisition last week.

Serica’s shares are down 20 per cent since late November, although it remains up 23 per cent year-to-date.

Serica chief executive Chris Cox, who used to run Spirit Energy, said: “There is also the potential for further infill drilling opportunities across the portfolio, most significantly at Cygnus, where drilling is ongoing.”

Shore Capital analyst James Hosie said the deal was “another example of industry consolidation within the UK”, adding that “Serica and its peers [are looking] to realise tax and operational synergies in response to the current fiscal and regulatory regime, while others seek to exit”.

The industry had pushed the government for an end to the energy profits levy in last month’s Budget, but chancellor Rachel Reeves confirmed that the 38 per cent charge on top of the 40 per cent corporate rate paid by producers would continue until 2030. The oil price is well below the floor that defines the ‘windfall’ nature of the energy profits levy, but the tax will only be scrapped ahead of time if gas prices fall below their own floor. The post-2030 regime should be friendlier to companies, however.

It will drop the headline tax rate from 78 per cent to 40 per cent, with a levy on sales when oil is above $90 per barrel and gas above 98p per therm. SP Angel analyst David Mirzai said the latest deals had been triggered by “the recent clarity on the oil and gas regulatory and fiscal changes”. AH

Improved profit and cash outlook lifts Serco shares

Shares in outsourcer Serco (SRP) jumped after the group upgraded its full-year profit guidance and said 2026 profits are likely to come in ahead of market expectations.

The company left revenue and organic growth guidance unchanged but said underlying operating profit is now expected to be around £270mn this year, ahead of consensus of £260mn, with a margin of 5.5 per cent. Free cash flow (FCF) guidance was also raised to £170mn, up from £130mn.

Order intake is expected to reach £5.5bn, with a book-to-bill of at least 110 per cent and roughly two-thirds of awards coming from defence. Serco anticipates year-end adjusted net debt of £265mn, equivalent to 0.9 times earnings before interest, tax, depreciation and amortisation (Ebitda).

First guidance for 2026 points to revenue of around £5bn, with organic growth improving to 3 per cent. Underlying operating profit is guided to be £300mn, up 11 per cent and ahead of consensus of £285mn, implying a margin of 6 per cent. FCF is set to come in at £160mn.

Serco also announced the retirement of chief financial officer Nigel Crossley after 11 years with the company. Mark Reid, CFO of Belgian telecoms company Proximus since 2021, will take over in March. Serco’s shares are trading at their highest point in more than a decade, climbing 5 per cent this week and 75 per cent year-to-date, to 270p. VM

Bunzl disappoints with downbeat 2026 guidance

Bunzl (BNZL), one of the FTSE 100’s worst performers this year, confirmed that its full-year results would land in line with expectations set alongside its April profit warning, but investors were newly rattled by a lacklustre outlook for 2026. Shares fell by as much as 6 per cent in early trading and are down more than a third year-to-date.

The distributor of consumables such as packaging, cleaning products, personal protective equipment and catering supplies reiterated its 2025 adjusted operating profit guidance, with a 7.6 per cent margin, alongside expectations for “broadly flat” organic revenue.

Management expects to see “good momentum” over the final quarter, helped by actions taken to address underperformance in North America and continental Europe. Even so, analysts at Panmure Liberum estimate that fourth-quarter sales fell slightly, following a 0.8 per cent drop in the third quarter.

Bunzl expects the pace of margin decline to ease in the second half. But that offers little comfort looking ahead, as the company warned that economic and geopolitical uncertainty would persist next year. It expects “moderate” revenue growth at constant exchange rates, driven by “some” organic growth and a small benefit from acquisitions.

UBS expects growth to be largely led by volumes, with pricing broadly flat as deflationary pressures offset the annualisation of tariffs. Crucially, though, operating margins are expected to edge lower next year given ongoing cost inflation and little benefit from price rises, suggesting that a recovery is still some way off.

“[We] are encouraged by operational improvements being made and new business wins in North America,” said chief executive Frank van Zanten. “We have presented our view of 2026, which highlights our expectations for a return to organic growth and ongoing cost actions to support a more stable profit outlook.”

The company completed its £200mn share buyback during the year and acquired Slovakian distributor Damito in October. It expects leverage to end 2025 at just over 2 times Ebitda. VM

Hikma chief steps down after tough year

Hikma Pharmaceuticals (HIK) has parted ways with chief executive Riad Mishlawi two years after he assumed the helm at the generic injectables business. The company said the change had been by mutual agreement.

The shares were marginally down in reaction on Monday, but the 25 per cent decline in Hikma’s share price this year reflects a difficult generics market.

Said Darwazah, Hikma’s executive chair and former CEO, will assume all operational responsibilities with immediate effect.

The company emphasised that none of its guidance had changed since a trading update in November; this means that group revenue is still expected to grow in the range of 4-6 per cent, with a slightly narrower core operating profit coming in at $730mn to $750mn.

Senior management changes have happened quickly at the company. In November, the head of Hikma’s injectables division, Dr Bill Larkins, announced that he was leaving at the end of the year. JH

Diageo to sell Kenyan operations for $2.3bn

Diageo (DGE) has agreed to sell its Kenyan operations to Japanese drinks group Asahi (JP:2502), as part of the drink-maker’s efforts to streamline its portfolio.

Diageo Kenya owns a 65 per cent stake in East African Breweries (KE:EABL) and an interest in Kenyan spirits company UDVK. The sale of the unit and its holdings is expected to raise $2.3bn (£1.7bn) and is set to complete in the second half of next year.

The FTSE 100 group said it has agreed a long-term licence with East African Breweries to ensure the “continued production and distribution of Guinness, local spirits and ready-to-drink brands” in the region.

The deal includes the Senator, Tusker and Serengeti beer labels. “With a strong brand portfolio and operational efficiency initiatives, the business offers high growth potential and stable profitability,” said Asahi.

After a bumpy 18 months marked by senior departures, Diageo has focused on divesting non-core assets to strengthen its balance sheet under interim chief executive Nik Jhangiani.

The shares are down by a third over the past year. Jefferies analyst Edward Mundy said the Kenya sale could “temper the debate around potential dividend cuts”.

The company has pinned its hopes on former Tesco (TSCO) boss Sir Dave Lewis to turn things around when he takes the reins from Jhangiani in January.

“There is some investor debate as to whether the new CEO looks to accelerate deleveraging through cutting the dividend, similar to the playbook at Tesco early on in his tenure a decade ago,” said Mundy. EW

Government action has defined 2025. Or inaction, in some cases. Business leaders have tried to pre-empt what the occupants of the White House and Downing Street are planning, but largely they have been at the mercy of politicians.

Donald Trump has dominated headlines this year through wild trade policies, efforts at peace in the Middle East and Ukraine and his assistants’ financial dealings from within the White House.

But the biggest shock was his so-called “liberation day” in April. Trump had promised trade tariffs before being re-elected, but what he delivered was far beyond what was expected.

Here in the UK, interest groups of all kinds called for radical change to rev up the economy, but the government managed to annoy almost everyone with higher taxes that won’t fully fund the significant spending increases on much of the country’s infrastructure.

The FTSE 100 turned into a top performer thanks to its global exposure, capturing both the local performance of the high-street banks and defence spending rises among the western allied nations.

Despite dropping behind the UK’s blue-chip exchange, the US market remained the driver of global returns despite Trump’s shock tactics in the first half.

This was because executives at the tech giants at the top of the S&P 500 quickly learned to deal with him by making extravagant local spending promises. Nvidia (US:NVDA) has recently even received permission to send some of its most advanced chips to China, in exchange for giving the US government a 25 per cent cut, largely through the personal efforts of chief executive Jensen Huang. 

Markets certainly recovered quickly from the tariff hit. Even before it was clear that Trump was likely to back down, the S&P 500 took less than a month to get back to previous levels. The tech giants in particular have accepted an erratic White House occupant given that the trade-off is carte blanche to build their artificial intelligence (AI) infrastructure.

That continued rollout, alongside promises and contracts now into the hundreds of billions of dollars, has led to significant anxiety over the mutually assured destruction approach of the top AI companies. This is another way of describing the ‘circular’ deals done by Nvidia and ChatGPT maker OpenAI, among others. Yet Nvidia’s profits have climbed enough that, remarkably, its valuation is still only a fraction ahead of the wider market.

In the UK, the government kept up the business-friendly rhetoric in the lead-up to the Autumn Budget, trying to both encourage investment and raise additional revenue for the state.

The general malaise was hard to get past, however. Years of inflation have already eroded people’s disposable income despite wage rises, and businesses are furious at the triple whammy of higher general operating costs, wages and taxation brought on by both last year’s and this year’s Budgets. Investors will also now be hit by higher taxes on dividends and savings. 

Market moves

Financial services lobbyists did at least score a win in this year’s Budget with a stamp duty holiday for newly listed shares. 

Peel Hunt analyst Charles Hall, prolific in his calls for capital markets reform in recent years, said the holiday was a good start but “as a country we definitively have to address stamp duty more generally if we want to be globally competitive”.

Before November’s fiscal statement, chancellor Rachel Reeves said broader market reforms were “bearing fruit” after several floats in October, and there has been a generally positive response to updating the London Stock Exchange listing categories last year. New arrivals overall remain far lower than the number of companies being bought out or merging, although IPO specialists predict improvement next year, thanks to the looser listing rules. 

Institutional outflows from UK shares continue, according to Calastone data, but as Peel Hunt also noted, this has come at the same time as the “FTSE 100 has been buoyed by greater interest from global investors”.

So the dour domestic sentiment is largely shown by the FTSE 250, which was a full 10 percentage points behind the FTSE 100 in growth terms this year.

The stellar performance of the senior index was carried by the sectors mentioned above, but the top performers were precious metals miners Fresnillo (FRES) and Endeavour Mining (EDV), while Rolls-Royce (RR.) continued its share price run from 2023 and 2024. Airtel Africa (AAF) was another standout thanks to rising customer numbers and profits, although it has a limited free float. Babcock (BAB) carried the defence torch.

Investors piled in to the first two companies for the obvious reason that profits would soar due to the rise in gold and silver prices. Rolls-Royce has been a momentum play for the past two years at least, but 2025 saw profit expectations continue to be upgraded thanks to the performance of its civil aerospace and power systems divisions. It also has the added benefits of defence and nuclear power exposure, areas investors have been wild for this year. 

Those top performers also show that government intervention isn’t everything. There are some links, of course – the UK and the US have committed to either permitting or building new nuclear plants, while gold has been helped by the uncertainty around the White House’s trade policies and disregard for debt levels. The FTSE 100’s worst performer was advertising and marketing giant WPP (WPP), which is down 60 per cent year-to-date on the loss of large clients and fears of the impact of AI on its industry.

Top of the table

In 2025, the MSCI All-World Index, which is weighted heavily towards the US, has recorded a total return behind the prior year’s (16 per cent against 24 per cent). But improved performance was visible in several other regional markets: for instance the Dax, as well as the FTSE, did better thanks to the shift into more defensive stocks.

In commodity terms, there were a few small players that outdid gold, but it was the yellow precious metal that shone, peaking at over $4,300 an ounce (oz) in October and December. The uncertainty when it fell below $4,000 in between shows just how expectations have changed. Is the next milestone going to be $5,000 or $3,000 an oz? The former looks more likely on momentum alone. 

Silver stole the limelight at the end of the year, making up some ground on the senior precious metal. Also ahead of gold on a year-to-date basis were tungsten, cobalt, ruthenium, rhodium, palladium and platinum. The first three saw rises on the back of security of supply or export bans. 

The good news is that platinum group metal mining companies have struggled for so long that further gains should easily impress the market and push share prices up further. 

As winter pressures mount and headlines once again warn of an NHS under strain, the assumption has been that independent hospitals would be the main beneficiaries. Patients frustrated by long waits increasingly turned to private options in the aftermath of the Covid-19 pandemic, while politicians continued to emphasise the role of the independent sector in tackling record waiting lists.

Against that backdrop, the 3 December profit warning from independent hospital operator Spire Healthcare (SPI) came as a shock.

The market was deeply unsettled not because it pointed to waning demand for healthcare, but because it exposed how abruptly changes in NHS commissioning budgets can affect earnings – and how little protection private providers have when it does.

Spire’s management blamed the shortfall squarely on a spending slowdown at integrated care boards (ICBs), the regional NHS bodies responsible for purchasing care on behalf of the NHS.

At first glance, that sits uneasily with news of rising NHS budgets and persistent waiting lists. But a closer look suggests Spire is exposed to a structural vulnerability that the market had underestimated.

Severe financial pressure

The problem is that while NHS spending has returned to growth in real terms, most ICBs are operating under severe financial pressure. Their priority is to keep core NHS services running, so commissioning elective work from independent operators becomes a discretionary luxury.  

This is exacerbated when costs rise unexpectedly, either through a harsh flu season or industrial action by doctors, and private elective work is one of the few areas where spending can be cut quickly.

NHS England figures show that independent sector elective admissions had already slipped around 3.4 per cent from their post-pandemic peak by late summer. What appears to have changed towards the end of the year, however, is not the direction of travel but the severity.

Commissioning volumes are typically signed off in advance, with providers often being paid for extra work if they exceed their agreed volumes.

However, ICBs have recently started enforcing strict caps and apparently threatening non-payment for overruns. That behaviour is unusual, and it removes the funding flexibility that private providers have historically relied on.

The financial consequences are amplified by operational gearing. While the reduction in NHS revenue implied by Spire’s downgrade is modest in absolute terms, a large proportion of the income lost dropped straight through to earnings.

As staffing and other fixed costs cannot be cut quickly, particularly if management expects activity to recover, the result is a disproportionate hit to profits. Panmure Liberum analyst Seb Jantet estimates that for Spire a £40mn drop in NHS revenue translates into a £25mn reduction in earnings before interest, tax, depreciation and amortisation (Ebitda).

Crucially, Spire is not alone in the sector and other independent hospital operators are facing similar issues. Indeed, the NHS’s budget problems has the power to cross continents.

For example, Ramsay Health Care’s (AU:RHC) UK business is even more dependent on NHS volumes than Spire’s, particularly in orthopaedics. While the UK arm is not listed, investors have started to factor these pressures into the valuation of the Australia-listed parent. Its shares have suffered bouts of sharp weakness this year after earnings downgrades highlighted problems in its UK and European operations. This included a A$291mn (£144mn) impairment on the value of its UK mental health business Elysium.

Side effects

Other knock-on effects could be felt across the sector next year. As NHS volumes are capped, independent providers are likely to compete more aggressively for insured patients. That raises the risk of pricing pressure, particularly for operators with a high fixed cost base.

For Spire, the timing is uncomfortable. The group has spent the past year increasing NHS volumes, partly to offset softer private markets, and partly in response to government signals that the independent sector would be needed. That strategy now looks exposed. While self-pay demand is improving, and private medical insurance volumes are broadly stable, neither is yet strong enough to absorb the NHS slowdown without pain.

From a valuation perspective, Spire gives investors plenty to ponder. Even after forecast cuts, the shares trade on an enterprise value to Ebitda multiple of 7.1 for 2026, and free cash flow yields are set to improve over the medium term, according to research from Panmure Liberum.

The broker said the profit warning might spur on the ongoing shareholder value review, with a possible byproduct that shareholders might be more open to selling the company at below 300p a share. The shares currently trade at 166p.  

For now, Spire’s profit warning is a reminder that the independent healthcare market remains tightly coupled to the financial health of the public system.

Given how squeezed the NHS is by various cost increases, ranging from pay levels to higher national insurance contributions, that may not prove to be a comfortable position.