Mergers:Irish market well placed to survive global credit squeeze
Last June, International Monetary Fund chief Rodrigo Rato told reporters he was worried that corporate marriages built on big debt in the recent merger frenzy could end in tears.
At that time, global mergers and acquisitions (M&A) activity was up 60 per cent compared to the corresponding period in 2006. Rato's concerns primarily related to rising interest rates in the US and the problems they had caused in some areas of the mortgage industry. He referred to repayment defaults and company collapses in the higher-risk (subprime) end of the US mortgage market and added: "We could see more of that in the mortgage market and other financial areas as monetary conditions tighten around the world."
Rato's view on reducing liquidity proved prescient. The subsequent evaporation of wholesale funding in the global credit market caused shock waves in the financial industry worldwide and led to the Bank of England extending emergency funding to Northern Rock.
While very few predicted the liquidity crunch, astute market commentators had expressed serious reservations about the huge level of debt that was financing the global M&A boom.
Adding to the highly-leveraged nature of many of the bigger M&A transactions were refinancings ("recaps"), with buyout companies being refinanced with higher leverage and on ever-increasing earnings projections, enabling the private equity investors to recoup their investment as early as a year after completing them.
In the global M&A industry, the credit crunch has hit financial buyers hardest due to the highly leveraged nature of their investments. The global value of failed buyouts in 2007 reached $202 billion (€141 billion, 76 deals) by early November, double the amount for the equivalent period in 2006. One of the highest-profile casualties was Sainsbury, where a Qatari-backed bidder blamed deteriorating credit markets for abandoning its €15 billion bid for the supermarket chain.
Concerns about the impact of the credit squeeze on UK consumer spending and the housing market have eroded the value of debt issued to fund private equity acquisitions in a range of sectors, having a knock-on effect on availability of financing for these deals.
So how has this affected the Irish M&A market? While deal activity (by value) increased in the third quarter of 2007 by 180 per cent from the second quarter to €10.7 billion, two transactions accounted for 80 per cent of this value and the number of deals in fact fell by more than a third.
According to Ion Equity's Tracker Survey, third-quarter transactions were generally the result of processes begun several months before the liquidity crunch took hold, which therefore had little impact on the number of completed deals in that quarter.
While the collapse of ISTC, which raises money on international markets to lend to banks, caused anxiety among Irish investors, the Irish M&A market has remained relatively unscathed by the credit crunch and appears well placed to survive the current turbulence.
A key factor underpinning this confidence is leverage levels. Compared to the UK and US markets, there is no substantial private equity presence (in the traditional sense of large funds managed by private equity firms) in the Irish market - a significant feature given that approximately 20 per cent of global M&A is transacted by financial buyers.
In Ireland, while financial buyers such as Doughty Hanson, Ion Equity, Boundary Capital and FL Partners have been active in the market, private clients of banks, stockbrokers and wealth managers have provided the equity for a large number of deals and they, in large part, continue to have the appetite and financial capability to pursue attractive deals.
As the level of private equity ownership in Ireland is small relative to the UK market, deal sizes are smaller, leverage levels are considerably lower and there is far less evidence of the aggressive price escalation witnessed in recent times in the UK. That market has seen private equity firms buying companies at the top of the market with record amounts of debt, followed by aggressively structured refinancings.
The credit squeeze there has resulted in those firms being no longer able to raise plentiful amounts of cheap debt to refinance acquisitions, potentially reducing M&A levels for some time. As the Irish market is characterised mainly by trade deals and private-client financed transactions at seemingly reasonable prices, the resulting lower leverage augurs well for the continued good health of Irish M&A.
It is also worth noting the significant share price reduction suffered by many Irish listed companies recently (more so than their European peers), which creates opportunities for trade buyers with strong balance sheets. Many of these companies continue to perform strongly, with a number of them posting record earnings.
Despite the worsening credit conditions, Irish deals concluded recently include Intel's $110 million acquisition of Havok, Moran Group's €500 million acquisition of Bewleys Hotels, Alphyra's reverse takeover of Cardpoint, and the €5.7 billion takeover of Depfa Bank by Hypo Real Estate, the largest corporate transaction yet in Ireland. The Depfa deal, between two major financial institutions, was announced in late July, with closing occurring in early October, so it was "in play" during an unprecedented period of market turmoil.
Barry Devereux is head of the corporate finance group at McCann FitzGerald
