Challenging year ahead for M & A activity

THE TREND in mergers and acquisitions activity in Ireland in 2008 is best exemplified by the fact that the largest transaction recorded during the year closed in the first weeks of January.

The €1 billion-plus acquisition of Airtricity by Scottish & Southern Energy marked the high water point and represented the last truly large-cap deal involving an Irish company over the past 12 months.

While the total volume of deals in 2008 (195) compares favourably with 2007 (196), the average value of deals declined markedly over the period from €156 million in 2007 to €55 million in 2008.

In overall terms, the value of mergers and acquisitions involving Irish companies fell by more than 70 per cent in 2008. Not surprisingly, the fourth quarter saw the steepest decline and represented the weakest period since the first three months of 2005, with only €473 million of disclosed deals taking place.

This trend is likely to continue into 2009.

This is due to, among other things, the very tight credit markets and their impact on the provision of debt to fund deals, the more cautious approach of both trade and financial buyers, vendors’ declining value expectations and the fall-off in acquisition multiples due to the deterioration in corporate earnings.

Of course, the sharp decline in mergers and acquisitions is not just an Irish phenomenon. With many countries, including Ireland, Britain and the US in recession, companies have had to divert their energies to managing the businesses they have rather than pursuing new acquisitions.

Looking back over 2008, the top five deals accounted for close to 40 per cent of total disclosed deal value. The majority of these deals occurred in the first half of the year and, as mentioned earlier, the highlight was Scottish & Southern’s acquisition of Airtricity in January. This transaction alone accounted for 18 per cent of disclosed deal values in the year.

The second largest transaction comprised IAWS’s acquisition of Hiestand Holdings through the acquisition of two separate stakes for a combined value of €458.6 million. IAWS subsequently merged with Hiestand to form the newly quoted entity, Aryzta. This strategic deal will create a global leader in the value added bakery segment.

CRH’s acquisitions of Pavestone and a 50 per cent stake in My Home Industries were responsible for the third and fourth largest transactions of the year.

Pavestone, the US-based manufacturer and distributor of concrete products, was acquired in March for €348 million while the half share in the Indian-based cement producer, My Home Industries, was acquired for €290 million.

AIB’s acquisition of a 49.99 per cent stake in the Bulgarian based, American Credit Bank, which provides secured finance to small and medium-sized companies in Bulgaria, represented the fifth largest deal of the year.

Other sizeable transactions include Glanbia’s €214 million acquisition of US based Optimum Nutrition and the disposal of a 50 per cent stake in the Jury’s Inn Group to the Oman Investment Fund for €200 million.

Looking to 2009, clearly there are significant uncertainties and major challenges on the horizon and it looks like the economic situation will get worse before it gets better. Concerted action is being taken by governments to stimulate activity and restore some confidence. These measures will ultimately have an effect.

In terms of the current cycle, 2008 saw a fall-off in valuations, while volume levels held up in the first three quarters.

However, 2009 will be the year in the current down cycle that sees a fall in volumes, albeit with an increasing number of opportunities arising from distressed sellers.

It will without doubt be a challenging year for Irish business and corporate deal activity will also prove challenging for buyers, sellers, funders and advisers alike.

Jonathan Simmons is a director at NCB Corporate Finance