5 February 2008
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The Irish economy continued its remarkable run of growth in 2007. In fact, if M&A activity is anything to go by, it was one of the busiest years ever for corporate Ireland, with the total value of deals exceeding e17bn (£12.72bn).
The private equity industry has driven M&A worldwide for the past number of years and Ireland has not been an exception, albeit at a different level of deal size and volume.
There have been very few blockbuster private equity acquisitions in Ireland due to the lack of large target companies. There was, however, reasonable activity in the mid-market in 2007.
The year saw Balderton Capital (formerly Benchmark Capital Europe) lead Alphyra’s e800m (£598.8m) reverse takeover of Cardpoint, while Alchemy backed both the e70m (£52.39m) management buyout of A-Wear from Brown Thomas and the e153m (£114.5m) take-private of Calyx.
Ireland’s geographic size means there are limited opportunities for indigenous growth by acquisition. Irish companies and investors have, therefore, increasingly started looking beyond Ireland’s shoreline for some significant deals. This trend is set to continue and become more dominant.
Over the past five years there has been a significant increase in Irish-led deals in Europe and beyond. In 2007 CRH acquired companies in Spain, Denmark, the Netherlands and the US. Other examples are Houghton Mifflin Riverdeep’s acquisition of Reed Elsevier’s Harcourt US Schools Education Business for e2.9bn (£2.17bn), Icon’s acquisition of Dutch company DOCS International, and AIB’s purchase of Estonian-based AM Credit. FL Partners was also in the news with its £170m purchase of the Racing Post newspaper, while AIM/IEX-listed Boundary Capital acquired Prontaprint.
On the sale side, leading renewable energy company Airtricity disposed of its US wind power generating assets in a deal worth $1.4bn (£720m) before itself being acquired by Scottish and Southern Energy for e1.8bn (£1.35bn).
What differentiates Ireland from its European counterparts is a strong private equity market driven by the private wealth management arms of main Irish banks such as Bank of Ireland and Anglo Irish Bank, stockbroking houses including Goodbody Stockbrokers, NCB and Davy, and wealth managers such as Quinlan Private. These private wealth arms do not ‘pre-fund’ private equity funds, rather they pull together private clients’ cash to fund or part-fund acquisitions on a deal-by-deal basis.
This has proved to be a very effective form of finance and examples include: FL Partners’ e60m (£44.9m) acquisition of WL Woolfson’s bed business, backed by Anglo Irish Bank Private Banking; Quinlan Private’s e1.1bn (£820m) acquisition of Jury’s Inn; and TVC Holding’s e41.5m (£31.06m) acquisition of 11 Comfort Inns, which was backed by Davy Private Clients.
The clear benefit of this type of private equity acquirer is the flexibility and speed in which they can complete a transaction, helping them land a number of deals ahead of others.
Another example of Ireland’s increasingly international M&A market is the country’s increased popularity as a jurisdiction for the incorporation of ‘bidco’ companies for international M&As. This is based on the variety of tax advantages available in Ireland, including potential relief from Capital Gains Tax on disposals. Irish companies are now regularly the company of choice as the acquisition vehicle for international deals.
An all-Ireland M&A market
Increased political stability in Northern Ireland has seen its economy stabilise and grow. As a result, more companies are expanding their presences on an all-island basis. Companies both north and south no longer consider the border a barrier to business. There are more opportunities for growth and cross-border acquisitions are likely to be more of a feature in the future.
Northern Ireland is seen as a much more attractive prospect than it was 10 years ago, with the benefits of a low-cost base and a highly skilled workforce. Over the past few years the two financial jurisdictions have drawn closer as both infrastructure and the economy have improved. For example, 2007 saw the introduction of an all-island electricity supply.
The credit crunch effect
The year started with a bang with the e1.8bn (£1.35bn) acquisition of Airtricity. However, the impact of the credit crunch cannot be ignored.
It is likely that Irish lending banks will be slower to provide acquisition finance where the debt cannot go straight to their balance sheets or where there is not a strong business relationship with the borrower. It is likely that larger deals will require upfront club deals between banks.
This may lead to a slower process and a deeper level of due diligence. However, as Ireland has generally been in the M&A mid-market, there is unlikely to be the same impact as in the UK and US with the fall-off of very big private equity deals.
The changed conditions in the credit markets are likely to take some of the wind out of the sails of the private equity houses. Accordingly, prospective trade buyers who have shied away from M&A activity in recent years could now start making a return, particularly with a rollback in target valuations.
From a practical perspective, there is likely to be a swing towards a buyers’ market and a drastic reduction in the auction sales that have so dominated the scene over the past few years.
There is also likely to be activity in the public takeover market, with falling share prices – in some cases pulled down by general market sentiment as opposed to specific company performance – putting some Irish-listed companies in play.
There is still confidence in the M&A market, notwithstanding the market conditions. While 2008 may not beat 2007 in terms of volume and deal size, it is predicted that the drop-off will not be too dramatic.
Julian Yarr is head of the London office at A&L Goodbody