MERGERS & ACQUISITIONS:UNDETERRED BY the credit crunch and the economic downturn, Irish deal-makers have demonstrated a sporting resilience in the face of sustained pressure on the mergers and acquisitions market.
The scene is certainly becalmed, but it is by no means dead. Well-capitalised trade players are seizing the initiative from private equity funds, who dominated M&A activity when easy access to inexpensive credit enabled them to outmanoeuvre even the stealthiest corporate operators.
Although valuations are well down, stock market volatility and a weakening economy are themselves a stimulus for deal activity. With the Irish equities on the decline from the dizzy heights reached early last year, a number of major companies remain in distinctly in play.
Sir Anthony O'Reilly still faces a potential takeover battle at Independent News & Media with Denis O'Brien, the noisy "dissident" shareholder who has built up a stake exceeding 23 per cent in that business.
At ferry operator Irish Continental Group, a standoff continues between chief executive Eamon Rothwell; Doyle Shipping and One51; and property investor Liam Carroll. Mr Carroll also controls 29.9 per cent of convenience food company Greencore, in which Icelandic company Bakkavör recently declared ownership of a 10.9 per cent interest.
Software company Iona Technologies is the subject of an approach from German company Software AG, although US company Sun Microsystems and another German operator, SAP, are also said to be taking an interest.
Bathroom manufacturer Qualceram Shires is also the subject of an approach. In recent weeks, insurance firm FDB successfully spurned an unwelcome €1.2 billion takeover approach from Dutch financial giant Eureko.
In terms of deals done, Horizon Technology is poised to leave the stock market following the likely (continued on page 21)
(continued from page 20) completion of a buyout by US
computer distributor Avnet.
If all of that suggests investment bankers remain busy, recent research points to the downturn in the Irish economy, particularly sectors linked to the declining property market.
It also flows from tough conditions in the lending markets. As a result, M&A players are obliged to increase the equity component of deals or take increased exposure to expensive mezzanine finance at a time when subordinated debt is already pricey. As a result of the higher cost of borrowing, buyers have less money to put on the table when bidding for assets. As banks conserve liquidity, only the most compelling transactions are likely to receive support.
The recent activities of some companies in the upper tier of the Top 1,000 list illustrate how the merger and acquisitions market has changed with the business cycle.
In the case of CRH, which tops the list and is Ireland's most active M&A player, new pressure on profit margins in the US and in some of its larger European markets serves to increase its imperative to move into the developing world.
Having spent €198 million for a 26 per cent stake in Chinese company Yatal Cement in January, CRH made its first foray into India in March with the acquisition of a 50 per cent interest in cement firm My Home Industries for €290 million. The company remains active in the US market, where it recently spent €348 million on the buyout of paving manufacturer Pavestone. CRH, which spent a total of €2.2 billion on 78 deals in 2007, hopes to maintain that level acquisition expenditure in the current period. The company ended talks late last year to buy up to $4.5 billion worth of assets from Cemex, its Mexican concrete rival, after the two organisations failed to agree a price. Any successful renegotiation of that transaction, were it to take place, would significantly increase the scale of CRH's operations as finance director Myles Lee prepares to take over from outgoing chief Liam O'Mahony.
Smurfit-Kappa, the other Irish-based industrial giant, recently indicated that it was examining many potential acquisitions as companies in the European and US packaging market weather tough conditions. Although Smurfit Kappa has some €400 million cash on its balance sheet, company chief Gary McGann has stressed that only deals that would enable the business to quickly pay down any new debt would be viable.
The largest Irish food company, Kerry, recently agreed to spend €165 million on the purchase of the Breeo food brands from Dairygold spin-off Reox, although the deal is now subject of a Competition Authority investigation. Numerous other (continued on page 22)
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acquisitions will be required if Kerry's newly-installed chief Stan McCarthy is to execute his strategy of doubling the company's annual sales to €10 billion in the next five years.
DCC's former executive chairman Jim Flavin may have been mired in controversy over the Fyffes insider trading affair, but that did not restrain the industrial holding company from increasing its acquisition spend in the year to March to €179.6 million from €112.3 million in the previous period and €62.9 million a year earlier. Despite the exposure of its day-to-day operations to sterling's weakness, DCC continues to pursue acquisition opportunities. Following Flavin's departure, parts of the business may yet become takeover targets in their own right.
Musgrave and Dunnes Stores, the privately-owned grocery titans, tend to concentrate on organic growth. Still, Musgrave increased its footprint in the North last year, buying cash and carry firm J&J Haslett.
Separately, it is a given that the credit crunch and worries about the domestic housing market haven't helped Irish Nationwide Building Society managing director Michael Fingleton in his efforts to sell the institution to a financial buyer. Having come close to a transaction on couple of occasions last year, no deal is imminent on that front.
There's been little enough M&A activity among other Irish financials of late, although AIB bought a 49.9 per cent stake in Bulgarian American Credit Bank for €216 million last February. Following Sean Quinn's takeover of Bupa's Irish health insurance business last year, Hibernian recently took a controlling interest in Vivas Healthcare.
Sectors to watch include property, now essentially a no-go zone for new investors. With some heavily-leveraged developers coming under pressure to meet their loan obligations, it is speculated in banking circles that there may yet be a consolidation of property interests among larger players who are under less financial strain. In addition, well-run firms such as Grafton and Kingspan, which have a heavy exposure to the property downturn, could yet attract bid attention.
The landmark deals of 2007 included the €1.16 billion sale of the Jurys Inn chain to investment firm Quinlan Private, which contributed to a €950 million profit from the sale of assets in the Jurys Doyle hotel business on the part of the family of the late PV Doyle.
If that transaction represented the very pinnacle of the property boom, the unwinding of the boom is likely to colour the M&A scene for some time to come. While companies in the infrastructure, healthcare, media and business services sectors remain of interest to financiers, few believe the sale of Airtricity's European unit for €1.1 billion to Scottish and Southern will be surprassed this year. When agreed on only the fourth day of January, that sale had all the hallmarks of "deal of the year".
It still does.
