Irish companies in trades and buyouts worth €5.9bn

Consolidation, the availability of cheap funding and increased attractiveness should drive purchases in 2003, writes Joe Devine

Irish  companies were involved in trade sales and buyouts worth more than €5.9 billion in 2002, compared to €5.08 billion in 2001.

Activity was dominated by the private-equity buyouts of Jefferson Smurfit, Green Property and BWG foods, and GeHe's acquisition of Unicare.

In addition, Irish companies were active abroad with €1.6 billion spent on foreign targets compared to €1.4 billion in 2001.

The M&A Tracker survey of mergers and acquisitions by corporate finance firm Ion Equity shows that, in terms of the number of disposals, more than half involved disposals to Irish buyers while 10 per cent were buyouts.

In value terms, buyout activity dominated the year with 86 per cent of the €5.9 billion spent on acquiring Irish businesses by management and their private-equity partners.

While the Smurfit, Green Property, BWG and Gehe/Unicare deals have been well documented, a number of positive trends are emerging in the €5-€100 million deal size category.

Consolidation of markets, the availability of relatively cheap funding and the increased attractiveness of Irish companies to foreign players are expected to be critical drivers of merger and acquisition activity in 2003.

Financial buyers are increasingly active as is evidenced by the number of management and institutional buyouts in 2002.

Inefficiencies in the market, funding difficulties and the exploitation of non-core assets of large groups create buyout opportunities.

Unlike trade buyers, financial buyers are not preoccupied with internal issues such as strategy.

Their objective is to maximise their return on investment. The acquisitions of Grassland Fertilisers, Nestlé Ireland, USIT and Allen McClay's acquisitions from Galen are prime examples of this trend.

In commodity markets, companies have consolidated for reasons of synergies in procurement, distribution and overheads.

This is evident in the dairy, value-added food and fuel oil distribution transactions that have taken place in 2002 involving Lakeland Dairies and Kerry Group, Erin Foods and Campbell Group, Maxol and Estuary Fuel, companies who historically would have been competitors.

The availability of competitively priced debt and equity funding will undoubtedly impact on 2003.

The bank debt market is becoming more competitive as all of the banks are now more focused on domestic growth businesses that have achieved scale following the growth of the economy in the past six years.

Banks are increasingly targeting the companies where they can lend €5 million-plus to companies with good growth plans, good management and operating in high value-added sectors.

The level of debt in the Green and other buyout transactions, together with the number of acquisitions funded without recourse to raising equity, are testimony to this.

There are significant private-equity funds based in the Republic and Britain looking to invest development capital.

Interestingly, shareholders can take the opportunity to crystallise value as part of their investment structure.

The buyout of companies by venture capital houses is far more developed in the UK and US than in the Republic, and this is likely to change in the short to medium term as equity providers are continuously looking for opportunities and consider that the Irish market should generate more deals than heretofore.

The attractiveness of Irish companies to British corporates continues. Our largest trading partner is a significant source of buyers and this is set to continue.

Media and services including consultancy transactions were prevalent in 2002.

Businesses sold to UK acquirers were at a premium to domestic disposals due to scale and market entry premia.

UK businesses are increasingly targeting those companies that have scale and are providing high value-added offerings to customers, particularly in sectors where the development of the Irish market lags the British experience. Scottish Radio Holdings, RPS, Serco and White Young Green continued to acquire in 2002.

Irish companies are increasingly achieving scale. After the economic boom, companies are bigger, better managed and more attractive to foreign entrants.

This is particularly significant in achieving a premium on the exit price. The Gehe/Unicare deal clearly demonstrated the value of scale.

Sectorally, media and publishing, health and pharmaceuticals, information technology and telecoms, and food represented more than half the deals in 2002 and these sectors, together with support and other consulting services, are expected to be the main source of activity in the coming year.

Value is a significant factor in deals and no matter how compelling the justifications for a deal, the vendors' and acquirers' expectation of value will determine the extent of activity in 2003.

Valuations are expected to increase as public equity markets are expected to move in an upwards direction in 2003.

Price earnings valuations have fallen, largely due to the uncertainty in global economic growth, the September 11th attacks in the US in 2001 and the tech bubble bursting.

This has put a brake on merger and acquisition activity, causing the number of deals to fall from the dizzy heights of 2000, as shareholders have not been satisfied that market values genuinely attribute an appropriate value to their companies either from a vendor or acquirer perspective.

The gap between buyers and sellers is closer than it was two or three years ago at the height of the boom, and the resistance to do deals should diminish over time as the earnings multiples increase.

Joe Devine is a director of corporate finance specialists at Ion Equity