Privates on parade
20 October 2003
The past 12 months has seen an unprecedented amount of public-to-private activity in Ireland. Alphyra, Arnotts, Conduit, Green Property, Jefferson Smurfit and Riverdeep have all departed from the Irish Stock Exchange.
Discussions are ongoing at Barlo, although recent talks regarding a possible management buyout of IWP have terminated. Whether this level of activity will continue is an ongoing topic of debate (particularly among lawyers and corporate financiers, for whom these transactions have been a welcome development given the decline in activity levels elsewhere).
The factors underlying this development in Ireland are similar to those in many other jurisdictions:
- The decline in equity markets (domestic and international).
- Historically low interest rates.
- Increasing interest from international private equity funds in backing Irish deals.
When the dotcom bubble burst, the ensuing decline in equity values was the catalyst for much of this activity. However, of the companies listed above, only Riverdeep, Alphyra and Conduit emerged during the heady years of the late 1990s. The take privates of the others were the culmination of many factors, often specific to the companies themselves, which unfolded over a much longer period of time. This is reflected in the diversity of the companies concerned. Targets have included a paper and packaging business (Smurfit), a property company (Green Property) and a 150-year-old retailer and owner of a flagship Dublin department store (Arnotts). The targets have also been very diverse in terms of size - Smurfit was valued at e3.6bn (£2.55bn) while Alphyra was valued at e100m (£70.9m).
The availability of debt and equity backing has also been crucial. The international private equity funds that have provided financial backing include Alchemy (Riverdeep), Madison Dearborn (Smurfit), Benchmark (Alphyra) and Merrill Lynch (Green).
Predictably, a number of the bids have been criticised as being opportunistic. Coming off the heights achieved by the equity markets in the recent past, shareholders in a number of cases have been faced with heavy losses on their investments. Their unhappiness has inevitably been exacerbated by the fact that many of the bids have been management led or had management involvement. The task of ensuring that the best price possible has been extracted from the bidder, and that the process has been run in an open and fair manner, has been a difficult challenge for independent committees.
A notable feature of these transactions has been the lack of competitive bids. While potential rival bidders have often put a toe in the water during the early stages, the first bid recommended by the independent committee has been successful in almost every case. This is most likely connected with the fact that in all cases (except Arnotts, which was a bid by family shareholders with a large shareholding interest), management was either leading the bid or had an equity stake in the bidder.
The unusual circumstances that transpired in Alphyra are indicative of the problems rival bidders face in these transactions. In this case, the bid was led by management, which was backed by Benchmark. First Data Corporation emerged as a potential competitive bidder after Rendina, the management vehicle, had put its first bid of e2.45 (£1.74) a share on the table. Management indicated that it regarded any bid by First Data as "hostile". First Data, faced with this reaction, did not proceed to make a bid (although an 'indicative' offer of e2.80 (£1.98) a share had been announced). To encourage shareholder acceptance in the aftermath of the First Data withdrawal, Rendina pushed its bid up to e2.70 (£1.91) a share and was ultimately successful in acquiring the company.
The transaction drew a considerable amount of negative comment. The difficulty Rendina had in getting the deal over the line is illustrated by the fact that, in an unusual move, the bid went unconditional, despite the fact that the 80 per cent acceptance level (the compulsory purchase threshold in Ireland) had not been achieved. Nevertheless, this illustrates how difficult it can be (despite the protections offered by the Takeover Code) to challenge a bid that the management is locked into.
No doubt conscious of the negative comment on Alphyra, the independent committee on Riverdeep came up with an interesting solution to this problem, which was positively received. A salient feature of that transaction was that, unlike Alphyra, the managers involved in the bid held what was effectively a blocking stake of approximately 25 per cent. It was agreed that the managers concerned would sell to any other bidder who came in at a price 10 per cent or more higher than their bid. No rival bid emerged, but the arrangement demonstrated that the bidder had 'emptied its wallet' and any rival bidder no longer had the difficulty of the blocking stake to overcome. Thus, while some shareholders might not have been overjoyed at the price, there was very little complaint about the process.
Significant minority interests were a feature of a number of the targets concerned. The independent committees charged with overseeing the bid process have accordingly been very conscious of the need to ensure that a competitive process is at least possible, notwithstanding such interests. Arnotts, for example, involved a long-drawn-out process, during which Carrgran, a bidder backed by Lehman Brothers, attempted to achieve a recommendation for its bid. Ultimately, however, two families, whose combined interests effectively amounted to a blocking stake, ended up making a successful bid for the company. The process run by the independent committee was successfully directed at ensuring that the family stake did not result in the bid price being artificially depressed to the detriment of other shareholders. The consensus in the market was that a fair price was paid, despite the fact that the bidder effectively held a blocking stake.
In terms of the future, speculation continues. A report from one of the Dublin corporate finance houses earlier this year suggested that there were up to 17 possible candidates for future take privates. The report reflected a view which has been commonly held in the Irish market for several years. However, experience has shown that these transactions are relatively complex to put together and are accordingly difficult to execute.
Possibly the deals that can be done have been done. Also, after a number of years of decline, share prices are beginning to rise again. It may be that the window of opportunity, through which some have jumped and others have been dragged, is about to close.
Tim Scanlon is a partner in the corporate finance department of Matheson Ormsby Prentice