Dealing with the downturn

FRIDAY INTERVIEW:Tom Godfrey  chief executive, IBI Corporate Finance

LIFE IN the world of corporate finance is tough going.

Deals are falling by the wayside as the euro crisis is freezing a lot of potential transactions, according to Tom Godfrey, the chief executive of IBI Corporate Finance.

Prospective buyers are pulling out and trying to take stock of how events in Europe might play out.

Godfrey says that the activity in mergers and acquisitions is back to 2003 levels – both in terms of the number of deals completed in 2011 and the multiples of earnings that buyers are willing to pay.

The big difference between now and seven years ago is the cost of bank borrowings and debt financing for deals. This is increasing as the crisis worsens.

Godfrey acknowledges that “leverage” in the buying and selling of businesses over the past decade had “clearly gone a bit ballistic” and multiples of earnings paid for firms had gone “off the scales”.

“That was all a function of cheap credit,” he says. “That had a knock-on effect of increasing asset pricing generally.”

The freeze in mergers and acquisitions has less to do with concerns about Ireland, says Godfrey; it’s bigger than that – the fears are all centred around the euro and whether it has a future.

He refers to the decision of Canada Life owner Great Life Westco, Canada’s second largest insurer, last month to pull out of the purchase of Irish Life at the last minute as an example of how fears are affecting deals out there.

“It is absolutely reflective of the macroeconomic situation. You are sitting in Canada and watching all this going on and you say, ‘you know what, I am just not going to bother for the moment’,” he says.

“That doesn’t meant that these assets don’t have a value and that they cannot be transacted; it is just becoming increasingly difficult to conclude a transaction – at the moment, it is wait-and-see.”

IBI was involved in advising on a possible takeover of food company Greencore by a US private equity firm Clayton Dubilier and Rice which subsequently fell through.

Godfrey cites large companies such as Greencore, Kerry Group and CRH as examples of the faster gear on the “two-speed economy”. These are Irish-based companies but the vast majority of their business is international, which has meant they have performed well in the global export markets.

As a result they have been able to remain active in buying and selling businesses, despite the paralysis in the wider mergers and acquisitions market. Concerns about another global recession stemming from the chaos in the euro zone mean exports will no doubt put them under pressure.

Even though their focus is international, these companies still need advice on business activity at home, says Godfrey.

“Our philosophy is to be the trusted local adviser and that often means we work alongside some of the large ‘bulge bracket’ banks on larger transactions,” he says.

Those “bulge bracket” banks, or tier one investment banks, include Goldman Sachs, Barclays Capital, Citigroup and Morgan Stanley and IBI is in competition with them on big-ticket deals as well as with the domestic challengers in the corporate finance divisions of stockbroking firms Davy, NCB and Goodbody.

Godfrey dismisses the reported offers from investment banks to work for free for the Government on valuing State assets and giving them advice on how to sell them.

“The market is competitive – we price it appropriately to do the job,” he says. “If somebody is willing to come in and do something for nothing, then you can be busy fools but there is no point in that.”

He doesn’t expect the sale of State assets to “create boom times for investment banks” and predictably says there is “just as much expertise in Dublin for these kinds of transactions”.

He admits that the sale of State assets is the “holy grail” for corporate finance advisers.

“Every investment bank and boutique and Joe Soap is trundling into town and every one of them is going to sell State assets. There will be opportunities there but not as many as there are investment banks knocking around looking to cash in on them,” he says.

IBI has worked on 31 transactions for 21 clients in 2011, says Godfrey, but he is most keen to point out that only six of these transactions involved the firm’s parent company, Bank of Ireland, which is deleveraging itself of €30 billion in unwanted assets to wean itself back to self-sufficiency.

“Our business is much deeper than that and a lot of that hasn’t been in the public sphere,” he says.

The company worked on the €5.2 billion capital raising for Bank of Ireland, which made the lender the only Irish bank to avoid Government control. IBI was one of the advisers and underwriters that shared €50 million in fees on the capital-raising exercise.

He disagrees with the claim that the €1.1 billion paid by the group of North American private investors, led by Canadian firm Fairfax Financial, for 35 per cent of the bank represented a firesale price.

This compares with the €4.2 billion injected by the State since 2009 in return for 15 per cent.

“You have got to recognise that the amount of capital that had to be paid was very substantial. When you just look at the metrics in relation to that, then the price was a reasonable one,” he says.

This year IBI has advised Kerry Group on the sale of a milk business in Limerick to Glanbia, Paddy Power’s acquisition of minority shareholdings in the Australian online sports company Sportsbet and Firecrest Clinical on its sale to Icon, the pharmaceutical firm.

IBI employs 22 executives involved in advisory work. Godfrey declines to get into details on the amount of annual fees IBI earns.

“It works on a percentage and the percentage is negotiated, and there are no hard and fast rules in that regard,” he says.

A veteran of IBI since 1989, Godfrey has worked on some of the biggest deals over that period – the takeovers of Jurys Doyle, Jefferson Smurfit and Green Property, and the flotations of Greencore, Irish Permanent and CC.

The deal he is most proud of is the purchase of a 24 per cent stake in Birmingham Airport by Aer Rianta (now the Dublin Airport Authority). The State company made a profit of €267 million on the sale of the stake in 2008.

“It was a very difficult deal because we were negotiating the purchase from seven district councils in Birmingham, each with its own voice,” he says. “In terms of complexity and the return we achieved, that was the one that sticks in the mind.”

Another memorable deal was Premier Recruitment’s purchase of British public company Imprint. The UK Takeover Panel gave Premier a “put-up-or-shut-up” deadline where it had to make a bid or else wait 12 months before it could make another approach.

“People thought we timed it this way but we made it at 11.59am and a bit. The panel said they wouldn’t give us an extra 60 seconds. In terms of getting it away right up to the wire, that is the closest that we have ever been,” he says.

Another satisfying deal for Godfrey was the purchase of Galway company Higgins Engineering, which made computer cabinets.

“That was a cracking deal. Out of nowhere this guy made something close to €100 million. Those kinds of deals are great because nobody knew who this was and it was a fantastic result,” he says.

Godfrey is less upbeat about the prospects for the Irish Stock Exchange, which is losing CRH’s main stock market listing today to the UK (followed by Greencore next spring) . The Irish bourse will continue to find life “very, very challenged”, he says.

“CRH will not be the last company to depart,” he says. “I think the stock exchange is somewhat limited on what it can do. You are just going to see a weakening Irish stock market unfortunately.”

Godfrey feels the UK’s opt-out of the latest EU treaty over fears about its effect on London’s financial centre is, contrary to the Government’s view, “not going to have a fundamental impact on Ireland” and is more about competition between London and Frankfurt.

He believes the treaty is Germany’s attempt to seek assurances before the European Central Bank agrees to “start the printing presses rolling” to generate liquidity in the markets and buying back sovereign debt.

“You have the euro zone trying to build the foundations of a building that was built in 2002 and those foundations need to be in place,” he says.

The markets want “simple, big bang solutions”, he says, and if they come, this will help his business of mergers and acquisitions.

“As confidence returns to the markets, you will see more activity. At the moment, everything is just in stasis,” he says.

ON THE RECORD

Name:Tom Godfrey.

A ge: 45.

Position:Chief executive at IBI Corporate Finance.

Home:Blackrock, Co Dublin.

Family:Married with two children from his first marriage, and a stepdaughter and new- born baby from his second.

Education: BComm and MBA degrees from UCD.

Hobbies:Work and going to the gym occasionally.

Something that might surprise:He is a big fan of Leonard Cohen and has travelled to see him perform five times in three countries on his recent tours.

Something you might expect:He has worked in IBI since he left college in 1989.