'Property plays' underpin strong growth in M&A activity

Mergers and acquisitions (M&A) activity in Ireland across all sectors was very strong in 2006.

Mergers and acquisitions (M&A) activity in Ireland across all sectors was very strong in 2006.

From landmark deals such as Eircom, Riverdeep Houghton Mifflin, Statoil and South Wharf plc (the Irish Glass & Bottle site in Irishtown) to smaller niche deals, the value of M&A deals involving an Irish target or acquirer was in excess of €15 billion. This was well ahead of the €11.3 billion figure for 2005.

Overall, 184 deals involving Irish companies took place last year, significantly ahead of the 115 deals the previous year. This strong M&A activity is a good indicator of the health of the Irish economy, which is feeding into prices for assets.

Investors, both domestic and foreign, are displaying their confidence in Ireland's continued economic growth into 2007 and beyond, and Irish companies and investors are increasing the scope of their activity, expanding into foreign markets and new sectors.

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Mid-sized family operations owned by ambitious niche operators and large multinationals, will, no doubt, continue to look to cash in while the going is good. While growth in M&A activity is taking place across all sectors, it is underpinned by the rising importance that property is playing across all aspects of the economy.

Any deal which involves a property portfolio of any substance (regardless of the value of the business itself) is now classed as a "property play" and investors are increasingly looking for hidden value in companies.

As both residential and commercial property prices rise and Ireland's development as a service economy continues, a significant element of the value of many companies is the land they own rather than what they do.

Companies, including Bank of Ireland and AIB, are leveraging their strong property portfolios through sale and leaseback arrangements to generate capital for further investment in their core businesses.

Even the terms and techniques of the property sector are becoming the norm for M&A transactions.

With private equity houses and companies chasing the same assets, increasingly the sale of assets is being done by way of an auction sale, previously the stalwart of the property sector. The effect of this is to get the highest possible price for the asset along with the best possible legal terms in the sale agreement.

Frequently buyers are reluctant to heavily mark up a proposed sale agreement, which must be submitted with the final offer letter, as in the competitive process a heavily marked up document can work against a bidder. Often final bidders, emerging through a due diligence process, are bidding somewhat "blind" in the final round until sensitive information is fully released when the seller is certain of a deal with a bidder.

From a purely market economics point of view, this is yielding excellent results for sellers. However, there are many buyers who may not share this view.

A notable factor is the increasing competition for assets between private equity houses and companies (trade buyers), which had been out of the market in previous years.

Trade buyers are now fighting back, with restructuring, consolidation and strong cash flow driving growth and consolidation. This competition, coupled with the rise in auction-style sale processes, has led to an upward effect on prices which has been augmented further by Ireland's strong economy, high employment levels and low interest rates.

The € 200 billion to be invested by the Government in capital infrastructure projects through the National Development Plan is giving big investors the confidence that growth will continue into next year and beyond. Investors from abroad are also displaying their confidence in the Irish economy, with Indian company Wockhardt's acquisition of Tipperary-based Pinewood Healthcare laying down a further marker in the growth in inward investment from Asia in particular.

M&A activity in Ireland looks set to become increasingly structured as the EU takeover directive becomes effective in January 2007.

The implementation of the takeover directive, which raises the threshold required for a compulsory takeover to 90 per cent, is likely to further increase the number of schemes of arrangement (requiring 75 per cent approval), such as that which facilitated Ulster Bank's € 887 million acquisition of First Active plc in 2003.

It looks increasingly likely that potential buyers will now look to these methods to get their bids "over the line" even if a rival bidder or reluctant shareholder holds a blocking stake in the context of the 90 per cent takeover directive threshold.

Through all this, property should remain the driving force. There will also be no shortage of potential buyers for those with access to high-value property reserves on the larger scale.

We can expect similar ventures as Fyffes' property spin-off Blackrock International Land plc and sale-and-leaseback arrangements (such as that employed by AIB and Bank of Ireland) to continue as large national and multinational companies seek to gain leverage and income from their substantial property assets.

Ultimately, the record levels of M&A activity suggest that investors are confident that growth will continue and that any impending slowdown, if it comes, will be a soft landing rather than a major crash.

Furthermore, inward investment, particularly from China and India, should contribute to growth.

However, with the increasing prevalence of cross-border investment and Irish companies investing abroad, it is important to recognise that value for money, not just an Irish address, will be the key to the ongoing Irish property and M&A success story.

Colm Duggan is head of the corporate department at Arthur Cox solicitors.