M&A deals rose 19% in value to €11bn in 2005, and activity is likely to stay at high level this year, writes Joe Devine
Positive sentiment among investors and supportive market conditions have produced another strong year for mergers and acquisitions (M&A) in the Republic, with a 19 per cent rise in the value of deals to more than €11 billion.
The annual M&A survey by Ion Equity shows a continuation of the trend towards fewer but larger transactions, with the number of individual deals falling from 190 in 2004 to 115 last year. The average value of deals rose significantly from €31 million to almost €99 million, although this was mainly due to a small number of very large transactions.
Ion's figures do not include some second-half deals from Irish multinationals such as CRH and Kerry, who usually do not announce these acquisitions until the new year. But in terms of the value of disclosed deals, the most active sectors were print and packaging, health and pharmaceuticals and leisure/ travel - largely due to a handful of major transactions which topped the table. IT and telecoms, media/ publishing and support services continue to feature strongly.
The biggest deals in 2005 included:
l €2.6 billion merger of Jefferson Smurfit and Kappa
l Waren's €2.3 billion acquisition of Warner Chilcott
l €1 billion purchase of Jurys Doyle Hotels by JDH Acquisitions
l Eircom's €420 million acquisition of Meteor
l Select Retail Holdings' €420 million takeover of Superquinn
l Bank of Scotland's €325 million acquisition of the Savoy Hotel from Quinlan Private
l Morgan Stanley/UGC's €325 million acquisition of NTL Ireland
l Diageo's €300 million acquisition of Bushmills from Pernod Ricard
l Quinn Group's acquisition of the Belfry Golf Club for €270 million
l Northgate's purchase of Sx3 from Viridian for €227 million
Private equity continues to play a significant role in the financing of major deals, while strong property values were an important factor in the investment rationale behind deals such as the Jurys Doyle and Superquinn takeovers. Asset-backing was also a key driver in the sale of the Irish Shell business in the Republic and Northern Ireland to the Ion Equity-led Topaz Energy group.
Media and publishing saw an upsurge in activity, following an established pattern in the UK. Regional newspapers have risen in profile and acquisition multiples have risen accordingly, as evidenced by the high multiples paid by Johnson Press for the Leinster Leader and Local Press groups.
Eircom's acquisition of Meteor for €420 million is typical of what one would expect to see in a healthy M&A cycle. Speculation concerning Eircom's future ownership continues unabated.
Bank of Scotland demonstrated its commitment to opening up retail branches with its €120 million purchase of the ESB retail business, while Iceland's Landsbanki has also sought exposure to the Irish economy by acquiring Merrion Stockbrokers.
"Trophy assets" continue to be sought after, including the Belfry Golf Club acquired in February by the Quinn Group for €270 million and the sell-off of the K Club in June to Michael Smurfit and Gerry Gannon for €115 million.
Interestingly, the second quarter of 2005 was down 32 per cent on Q2 2004 and 55 per cent on Q1 2005, largely due to the absence of "mega" deals. During this period, CRH (a traditionally active buyer) commented on the fact that it was witnessing a slowdown in deal-flow partly as a result of increasing price expectations on the part of the vendors. This is inevitable as asset sell-off's become more and more competitive. Kerry, CRH and others have yet to disclose the extent of their acquisition activity in the last quarter and this will be indicative of volume trends.
Looking ahead, rising oil prices and euro interest rates have done little to dent investor confidence so far. Leading hedge funds are predicting oil prices could climb as high as $100 a barrel over the next few years. Economists forecasting a significant correction in Irish property prices have yet to produce any evidence of a downturn in the foreseeable future.
Positive trading conditions are likely to continue over the coming months. Ireland is quickly establishing itself as a favourable place to do business in its own right. As our economy matures, our traditional reliance on foreign direct investment is not as great. We have benefited greatly from our approach to international trade, successfully competing as a small open economy. This can only be sustainable if indigenous enterprise is allowed to flourish and care is needed to ensure cost rises are sustainable.
The availability of private equity continues to be a major factor in meeting this objective. This form of investment is relevant not only for larger transactions but also as a catalyst for change in mid-size, indigenous, and non-core asset deals.
In terms of M&A activity, the climate is opportune for deal-making across all sectors. As with 2004 and 2005, inexpensive debt, low inflation, healthy economic growth and good management teams continue to shape our business landscape, although the overall outlook is somewhat clouded by concerns over social partnership, costs and international interest rates.
Despite these concerns, we believe M&A in 2006 will be characterised by a small number of flagship deals and continuing strong valuations.
Joe Devine is a director of corporate finance specialists Ion Equity.
