Not All Buyers Are Pricing Equity

The most revealing detail in the Bodycote deal was not the offer. It was the share price sitting above it. Veritas Capital tabled a recommended cash offer of 940p per share, valuing the heat treatment specialist's equity at roughly £1.65 billion and £1.85 billion including debt, having outbid rival buyout firm CVC to secure the board's backing1. Yet the stock closed higher, near 955p, because the market expects CVC to return with more2. The received explanation for deals like this is that London is cheap, so American money arrives to collect the discount. That explanation is real, but it is incomplete. The market pricing Bodycote above the agreed offer is not making a claim about what the business is worth. It is making a claim about how much debt someone can raise against it.

Seven Hundred Million, Give or Take

The number that sets the bid is not on the offer announcement. It is on the term sheet Veritas took to its lenders. A private equity buyer funds a deal like this with equity from its fund and leverage from a credit provider, and the leverage available caps how high the equity bid can reach. Underwriting policy across leveraged finance has held within a band of roughly 40 to 60% of enterprise value. Against Bodycote's £1.85 billion enterprise value, that implies acquisition debt somewhere between £740 million and £1.1 billion, with Veritas equity filling the rest. Move the lender's loan-to-value a few points either way and the whole structure shifts: more debt lets the equity bid climb, less debt caps it. That is why the ceiling belongs to the credit fund, not the equity analyst. Veritas can offer 940p because a lender will write the debt that makes 940p work. CVC can threaten more only if a lender will write more.

A Necessary Condition, Not a Sufficient One

The discount explains which market gets hunted. It does not, on its own, explain when a bid lands or how high it goes. London has traded at a discount for years, and cheap assets sat on the exchange the whole time without being bought. What decides whether one of them is taken out is whether a lender will fund the buyer, and on what terms. A discount tells a buyer where to look. Credit capacity tells it whether it can act, and at what number. Bodycote was no cheaper the week before the bids than the year before, when no bid came. The equity was always attractive. What had to line up was the financing.

Tight Everywhere, Except Where It Counts

Here the story turns, because the obvious version of it is wrong. You might expect a bid this size to signal loose, abundant credit. It arrived into the opposite. Through 2026 the private credit market tightened, resetting in a decisively more lender-friendly direction, with spreads on new loans widening, covenants and documentation firming up, and managers with dry powder growing markedly more selective3. New-loan spreads ran roughly 25 to 50 basis points above late-2025 levels. Deployment stalled: completed direct lending transactions fell to 154 in the second quarter from 217 in the first, the weakest quarter since 2023, and direct-lending LBO volume hit a near six-year low with just 36 buyouts financed4. A tightening market that funds fewer deals should, in theory, produce fewer bids, not a contested auction at a premium.

The resolution is that "the credit market" is not one thing. It tightened in aggregate while staying wide open for the right collateral. Lenders pulled back hardest from the sectors they had learned to distrust, with software spreads blowing out roughly 245 basis points wider than the broader loan index on fears about what AI does to those borrowers5. Bodycote is the opposite kind of asset: the world's largest heat-treatment business, with aerospace and defence exposure, physical facilities, and durable industrial cash flows. That is precisely the collateral a cautious lender still competes to finance. The underwriting ceiling did not lift for everyone. It lifted for assets like this one, which is why the bidding war is happening here and not around a mid-market software company.

The Objection That Has to Be Answered

There is a serious counter-argument, and it deserves to be felt rather than waved away. The discount is not an outside inference. It is self-reported by the companies living inside it. When Petershill Partners announced it would delist and hand capital back to shareholders, it cited dissatisfaction with its own share price and valuation6. That is a board looking at its own equity and concluding the public market will not price it fairly, whatever the credit environment does. If companies themselves are naming the London valuation as the problem, then perhaps the discount really is the engine and the financing is just the plumbing that follows. This is the strongest form of the case against the argument here, and an honest reading has to sit with it.

The answer is not that the discount doesn't matter. It is that the discount and the credit conditions do different jobs. The discount determines which market attracts the bids, which is why the targets cluster in London and not New York. Credit capacity, asset by asset, determines whether a given bid materialises and how high it climbs, which is why Bodycote draws a contested auction while other cheap London names sit untouched. Petershill is describing the first force. The £740 million-plus of debt underpinning Veritas's bid, and the market's wager on more, is the second. Both are true. Only one of them moves when a lender changes its loan-to-value on a specific asset.

What Would Prove This Wrong

The claim is falsifiable, and it should be stated plainly, because the cycle is actively testing it. Credit has tightened, and the argument here survives only if lenders keep funding the quality end even as they retreat elsewhere. So watch the dispersion. If the tightening broadens, if spreads widen and loan-to-value falls even on industrial, asset-backed names like Bodycote, and UK take-privates keep coming anyway at these prices, then financing was never the binding constraint and the pure equity-discount story wins. Equally, if the bids that keep landing are all clustered in the sectors credit still favours while the rest of the cheap London market stays untouched, that is the financing ceiling doing exactly what this argues. The test is not whether deals continue. It is which deals continue, and whether the lender's door stays open for the assets drawing the bids.

A Financing Story Wearing an Equity Costume

Veritas reaching 940p was not simply evidence that Bodycote was cheap. Cheap it may have been, but cheap it was for years without a buyer. What arrived was not a fresh appreciation of the equity. It was a lender willing to write £700 million or more against this particular kind of asset, even in a market that had grown stingier everywhere else. The London discount is the map. The credit fund's underwriting policy, asset by asset, is the budget. And a market trading above the offer is not telling you the business is worth more. It is telling you it thinks a lender will go higher.

Footnotes

  1. Bloomberg, Veritas Capital to Buy UK's Bodycote for £1.65 Billion (opens in a new tab), 1st September 2026.

  2. Private Equity Wire, Veritas Capital outbids CVC in £1.65bn Bodycote deal (opens in a new tab), 2nd September 2026.

  3. Lord Abbett, 2026 Midyear Investment Outlook: Private Credit's Lender-Friendly Reset (opens in a new tab), 4th June 2026.

  4. Angel Investors Network, Private Credit Raised $16 Billion in Q2. Only Half of It Found a Home (opens in a new tab), 16th July 2026.LCD / PitchBook, Large deal drought drags private credit LBO financings down 21% YoY (opens in a new tab), 25th June 2026.

  5. Valuation Research Corporation, Private Markets Trends: Q2 2026 Private Equity & Credit Update (opens in a new tab), 23rd June 2026.

  6. Reuters, UK Market Exodus: Companies that moved away from London listing in recent years (opens in a new tab), 1st October 2025