Greener pastures

Bank restructuring, slowly rising M&A activity and official overtures towards investment funds are keeping Irish lawyers smiling.

Ireland’s continuing courtship of investment funds, the entry of Dechert into Dublin and the Irish ­government’s decision to split up Anglo Irish Bank means lawyers in ­Ireland have had a lot to get their heads around this year.

On the plus side, deal levels have increased. According to research by ­Thomson Reuters, M&A deal value ­(including net debt) in Ireland for 2010 so far stands at $5.41bn (£3.46bn), which comes from 38 deals. The numbers are a shadow of those posted in the halcyon days of M&A in Ireland, but represent a solid improvement on 2009, for which the total ranking value of M&A targets was $3.14bn over 77 deals.

This boost certainly owes something to the National Asset Management Agency’s (Nama) $1.69bn purchase of the Bank of Ireland loan portfolio, but nevertheless activity is rising.
So as Ireland looks to be turning a corner, The Lawyer decided to get some expert opinion on the biggest issues affecting lawyers and firms in Ireland.

QOn 1 September Dublin regulators ­softened the financial market rules in ­relation to hedge funds. What will this mean for the market and law firms’ funds teams?

ADualta Counihan, partner, asset management and investment funds group, Matheson Ormsby Prentice

This is a beneficial development for the Irish market and law firms operating here, as it will further fuel the growth in fund platforms being launched here.

A number of the world’s largest ­investment banks and international ­institutions are choosing Ireland to ­establish Undertakings for Collective Investment in Transferable Securities [Ucits] fund ranges.

The recent policy update by the regulator in relation to the naming of sub-funds ­within an umbrella structure is a welcome development that will enable clear ­branding of an investment manager’s Ucits strategies on a platform.

ABrian McDermott, head of investment funds, A&L Goodbody

The rule change in question was not ­specific to hedge funds, but relates to ­naming conventions for funds structured as umbrella funds – ie fund platforms that can offer a variety of investment products within one legal structure.

The regulator’s previous policy did not allow an investment manager’s name to be the only one used in the name of a ­sub-fund of an umbrella fund. This posed certain ­practical challenges for investment ­managers looking to use third-party fund platforms to establish their own product without having to incur the time and expense of setting up a separate legal ­structure.

While the change is not specific to hedge funds, it will be welcomed in our view, in ­particular by hedge fund managers looking to establish so-called ’Newcits’ funds, who elect to use a third party’s Ucits platform rather than establish their own dedicated vehicle. The ability to brand their sub-fund with their own name should greatly ­facilitate the separate marketing and ­distribution of sub-funds by such managers. This facility should also make it quicker and easier for such managers to bring a product to market. The change will be ­welcomed universally by law firms’ funds teams in Ireland.

We have seen a marked increase in ­product development this year, particularly in the Ucits space, and expect this trend to continue. The continuing interest of hedge fund managers in establishing both Ucits and qualifying investor funds in ­Ireland, together with the opportunities for such managers to move existing funds offered by Ireland’s investment company redomiciliation legislation, should ­continue to generate work for firms with recognised expertise, strength in depth and a track record in these areas.

APádraig Ó Ríordáin, managing partner, Arthur Cox

Allowing managers to ­participate in third-party fund platforms using their own brand name on the sub-funds they manage is a ­further example of Ireland responding to the need for cost-­efficient regulated fund structures.

It also enables these managers to use platform providers as ­distributors of their product so ­managers can focus on their core expertise of investment management.

AFionan Breathnach, partner, financial services department, Mason Hayes & ­Curran

This is going to have a positive effect and we will see an increased colonisation of ­Ireland by foreign funds in the coming years. It will reinforce Ireland’s position as a critically important financial and legal centre.
Legislation facilitating the ­­­redomiciliation of funds from offshore locations to Ireland became effective on 7 September 2010. Under it, funds structured as companies can redomicile in a straightforward manner to Ireland from Bermuda, the British Virgin Islands [BVI], the Cayman Islands, Guernsey, the Isle of Man and Jersey.

Investment managers with funds based in offshore jurisdictions are showing enhanced interest in establishing regulated funds in Ireland in response to increasing investor preference for more regulated, liquid and comprehensible fund products. The ­legislation provides a transparent method to achieve this while the fund retains its ­corporate identity and record, assuming no significant change in investment policy or fee structure.

QM&A activity in Ireland is starting to pick up. A recent private equity deal – Capvest establishing Valeo through the ­purchases of Origin’s food division and Bachelors – required the involvement of five banks to find financing. Has the way corporate deals are done changed for good?

ABryan Bourke, head of corporate, William Fry

I don’t think the Capvest/Valeo deal ­necessarily signals a change for good in the way corporate deals are done in ­Ireland. M&A levels have improved, and it ­certainly is the case that lending for M&A is still not buoyant – we’ve been seeing a lot of ­purchasers buying with their own cash reserves. However, we’re seeing some deals with single bank financing.

Credit isn’t easy at this point still, and I’m not sure there’s an identifiable pattern yet, but the overall shape of M&A doesn’t seem to me to have changed forever. To me, it seems that levels of transactions will not go back to where they were for a long time.

There will be deals like Capvest/Valeo where, either because of the number and identities of parties involved or the ­complexity, there’s an involvement of more than one or two banks. I’m not sure that it’s the pattern going forward, however.

AEnda Newton, corporate partner, Byrne Wallace

Fundamentally, the way M&A deals are done will remain the same, but the most appreciable difference in M&A deals today is the time it takes to get a deal across
the line.

The number of leveraged M&A transactions has fallen to a trickle and the deals that are being concluded at present are mostly balance sheet-financed. As a result purchasers are much more ­cautious, due diligence is more protracted and ­decisions take longer to make.

ADavid O’Donnell, corporate partner, Mason Hayes & Curran

M&A activity in the first six months of 2010 has been surprisingly resilient in Ireland, and while the number and value of deals has reduced, current dealflow leaves room for optimism.
However, banks are now being much more selective in terms of the type and quantum of transactions they’re likely to back and will no doubt insist on a much more thorough due diligence investigation of transactions than was previously the case.

In addition, as the cost of funding for the banks has increased as a result of the ­credit crunch, more equity is now required to fund deals. In terms of financing larger ­transactions it’s also more likely that bank syndication will become more common, whereby a number of banks will be involved in financing transactions. This is now more likely to continue to be the case for ­transactions in excess of e100m (£83.4m).

In terms of dealflow, 2010 has seen some of the largest M&A deals since the start of the credit crunch. We were the adviser on the $1.1bn sale of SkillSoft to a private ­equity consortium, which included ­Berkshire Partners, Advent International and Bain Capital. We also advised on the sale of a 48.5 per cent stake in Dragon Oil to Emirates National Oil Company for £1.2bn, which further highlights the strength in the Irish market for successful companies.

In terms of small- to mid-cap companies, the current uncertainty in the financial markets presents a major opportunity for trade buyers to move back in, in circumstances where they would have previously been priced out by ­private equity firms.

In general , such trade buyers have greater potential to create synergies and cost savings from company acquisitions due to their knowledge of the market and their in-depth knowledge of how competitors in their arena operate.

Companies with strong balance sheets and clear long-term objectives are likely to be attractive targets for such buyers and are also more likely to be the type of companies the banks are willing to finance.

APádraig Ó Ríordáin, Arthur Cox

We see it as a positive development that banks were willing to participate in ­acquisition finance for a ­private equity transaction that is reasonably ­substantial in terms of the combined enterprise value of the acquired businesses, by the standards of the Irish market.

This demonstrates the ability and appetite of the banks ­concerned to fund acquisitions of assets, provided the asset is a ­quality one and with an equity provider with a strong record. What is noticeable about the finance for this transaction is that it’s a club deal rather than a syndicated one. It seems likely that acquisition finance ­involving more than one bank will be ­structured in this way for the foreseeable future.

APatrick Spicer, corporate finance partner, Matheson Ormsby Prentice

The way corporate deals are done in Ireland hasn’t changed for good. The Capvest/Valeo deal is obviously encouraging in that it was a leveraged deal where the financing was led by a leading Irish bank, and there have been very few domestic leveraged deals in the past two years.

However, outside domestic bank ­recapitalisation transactions, the majority of M&A deals have involved international corporates with strong balance sheets acquiring Irish businesses, such as William Grant’s acquisition of C&C Group’s spirits business, part of which it has just agreed to sell to Campari, and Xerox acquiring Irish Business Systems.

ADavid Widger, head of corporate, A&L Goodbody

I certainly believe modest leverage is here for the foreseeable future, but I don’t expect that large syndicates of banks for mid-­market deals will be any more prevalent in Ireland than elsewhere in Europe, not least because it will be non-Irish finance providers in the main that will be funding such corporate deals.

We’re also increasingly seeing strong trade buyers acquiring Irish businesses without any leverage. For example, we recently acted for Campari on the ­acquisition of three Irish liquor brands for e129m, which was self-financed.

QWith Anglo Irish Bank’s split into a ­funding bank and an asset recovery bank and the latter being wound down over a couple of years, will this mean more restructurings with the bank offloading assets?

AJohn Gulliver, tax partner, Mason Hayes & Curran

There will be multiple asset disposals and restructuring activities in the coming months and years. By the end of the year Nama will have acquired up to e80bn of face-value debt for around e40bn, or roughly a 50 per cent discount. Tough ­decisions will need to be made to sell or hold these assets, and with increasing ­pressure for government ­funding some may be sold sooner than anticipated.

AJames Somerville, corporate and tax partner, A&L Goodbody

The splitting up of the bank in this way could result in the acceleration of certain restructurings and enforcements, but not necessarily increase the number of ­restructurings.

We might see more of the Calyx-type sale of secured debt by Anglo’s asset recovery bank in relation to trading company loans.

APádraig Ó Ríordáin, Arthur Cox

The primary sales of assets over the next few years are likely to be generated by Nama as it progressively sells assets it has purchased from the banks, including from Anglo. I expect that Anglo will work to optimise the value of all of its assets, including through restructurings or ­disposals as may be appropriate.

QIf the EU goes ahead and creates a ­consolidated tax base, what would this mean for Ireland?

APádraig Ó Ríordáin, Arthur Cox

Nothing in terms of Ireland’s low 12.5 per cent tax rate. The CCCTB [concept of a ­common consolidated tax base] is a ­proposal for allocating the profits of multinationals throughout EU jurisdictions in which they operate. Such profits will continue to be taxed at whatever rate is set by each ­individual jurisdiction.

The European Commission has been emphatic about this. In Ireland’s case that rate is 12.5 per cent, which has been declared to be part of Ireland’s brand by this government and agreed to by all major opposition parties who might form a future government.

In any event, the proposal has been around for some time, and as there are ­significant political and practical hurdles to its implementation it is premature to speculate on its potential impact.
AMartin Phelan, head of William Fry

Tax Advisors

A consolidated tax base would effectively erode the profit base that is taxed in Ireland, leading to a reduced level of taxation. This would force Ireland to increase its rates to compensate.  

It will never happen, as to pass such a resolution requires unanimity and Ireland will never vote in favour of anything that could jeopardise our right to manage our own fiscal policy.
AGulliver, Mason Hayes & Curran

The distinction in EU member states between civil law and company law systems makes the introduction of a consolidated tax base a potential minefield for legislatures.

If it could be achieved – and it is a big task – Ireland would still maintain one of the lowest effective corporate tax rates in the EU. Its tax rate, common law system and well-educated, English-speaking workforce would still cause it to be a natural Europe, Middle East and Asia platform for US and Asian corporates, particularly those with IP portfolios, as there is a number of ­opportunities for IP-orientated corporates to reduce their tax bills further.

Ireland’s treaty network would not be affected either, at least initially, by the ­introduction of a consolidated tax base.

AJames Somerville, A&L Goodbody

It’s very hard to say at this stage because there isn’t a proposal on the table. To date the CCCTB project has been solely a ­Commission initiative, and the last ­published information was a working group report in 2008.

The options could range from simply introducing a common methodology for calculating taxable profits across the EU to cut down on administrative costs for a multinational preparing tax computations, to a calculation of a single EU group taxable profit and the reallocation of that profit to operations in individual member states.

The former option is unlikely to have any material impact on Ireland, whereas the latter, in a worst-case scenario, could result in the reallocation of EU-derived profits of multinational businesses from their Irish operations to operations in other ­jurisdictions, and as a consequence reduce the Irish tax base.

If the proposal sees the light of day it seems unlikely that the latter alternative would be acceptable to a number of member states. While in such circumstances it would be open for countries in favour to adopt the enhanced cooperation provisions and form their own bloc, doing so might further ­complicate rather than simplify matters for multinational taxpayers.

QFor a long time a small number of firms in Ireland have dominated. Has there been a perceptible change in the dynamic of the market since the entrance of foreign firms?

AJohn Kettle, commercial partner, Mason Hayes & Curran

The foreign firms have been primarily focused on the investment funds arena due to Dublin’s strong global presence in that sector.

This expansion has been positive in terms of invigorating the market and has real potential to further increase the workflows coming into Dublin.

We’re working with this new dynamic, as we believe it will increase the opportunities for us. The question of whether it will result in a wider range of firms dominating the market is harder to assess.

Looking at recent dealflows, it seems that the same six full-service corporate firms are still commanding the lion’s share of the instructions outside of funds, so the foreign firms aren’t significantly changing that ­particular dynamic. Indeed, it seems that those firms that have a dedicated ­international and broadly based focus are the ones that have weathered the recession well. This is our own experience and we believe it will continue as Ireland recovers and our exposure to global markets allows us to catch any tailwinds more ­readily than others.

APádraig Ó Ríordáin, Arthur Cox

The dynamic of the market hasn’t changed much since a small number of foreign firms entered it. There has been some movement of partners to the new arrivals in certain niche areas in which those firms wish to focus their practices, such as funds, and those areas of the market have obviously been affected to an extent. However, the majority of the Irish market hasn’t been affected.

QApart from restructuring, what else is driving practices in Irish firms at the moment?

AMyra Grant, managing partner, William Fry

Apart from restructuring we’ve seen a marked improvement in M&A activity, with deals such as the Electricity Supply Board’s agreement to buy Northern Ireland ­Electricity and a number of other significant transactions.  

While not bringing us back to the M&A levels of 2006-07, deal values and volumes are at the highest level for the past couple of years, which is good.

Other areas that have been driving the practice include our asset management/ funds practice – the funds industry in Dublin continues to perform strongly despite the global crisis, and this is borne out by the entry of foreign firms into the market – as well as debt capital markets and tax.  

Litigation has obviously also been a strong driver in Ireland, given the number of disputes that have resulted from the change in economic circumstances and the ­regulatory issues that have arisen following the financial ­collapse.AJulian Yarr, managing partner, A&L Goodbody

Despite continuing negative press ­sentiment towards Ireland, we’re seeing international confidence from our ­existing clients and new market entrants across a number of sectors, such as ­insurance and reinsurance, investment funds and energy.

This shows Ireland remains an attractive place to do business despite the economic challenges. A number of our specialist areas have seen growth, including corporate and private equity, financial services, investment funds, IP/IT and corporate taxation.

Our real estate teams have remained busy, advising the majority of the Irish banks on their Nama processes. However, we’ve also begun to see a small increase in new investment transactions. We’re ­currently advising on three ­significant property ­transactions with ­international buyers.

We also expect further liquidity to occur through the realisation process Nama will bring, and there has been an uptick in ­corporate activity. More merger notifications were made to the Irish Competition ­Authority in the year to August than in all of 2009.

Again, the international market is driving the M&A activity. Generally deals have been driven more from trade buyers, with finance coming from ­balance sheet funds as opposed to significant debt financings. ­Private equity is also becoming more active again, ­particularly at the top end of the ­market. There will continue to be deal ­activity in the banking sector as ­European ­restructuring plans for the Irish banks ­continue to unfold.

The future for Ireland’s funds industry looks bright and our funds division is busy. The alternative investment industry globally is facing a number of challenges as a result of the credit crisis, but Ireland is well ­positioned to respond to the need for ­regulation and transparency in both ­Ireland-domiciled alternative ­investment funds and non-domiciled funds serviced here.

Our IP team is busy, with a number of ­significant disputes in the pharma sector. The Irish Commercial Court is now ­recognised as a key forum for deciding patent disputes.

AEnda Newton, Byrne Wallace

The impact of the new market entrants has yet to be felt. It can be said that the entry of firms from the US and the Caribbean is ­primarily driven by the need for them to service the investment funds work that is migrating from locations such as BVI and Cayman. For local firms with large funds practices, the arrival of ­foreign firms undoubtedly creates a new level of ­competition.
It remains to be seen whether the new entrants will broaden their offering and compete with the larger local firms.