The initiative now lies with strongly capitalised corporate buyers, often the also-rans when private equity funds drove valuations to peak levels, writes Arthur Beesley.

AFTER A forceful bull run in which private equity firms dominated the merger and acquisitions (M&A) scene with the aid of easy credit, trade buyers are gathering strength as the prime players in a diminished buyout market.

The froth has blown off company valuations, but that in itself is a stimulus for buyers. The big question now is whether sellers take the bait or decide to wait until market conditions improve.

If the deal frenzy of the boom times came to an abrupt end with the calamitous credit crunch last summer, financiers see new opportunities in a market shaped by the economic downturn and exceptional volatility on stock exchanges. Property is now a no-go zone for many big investors, prompting them to examine other asset classes and markets outside Ireland for opportunities.

"Valuations have come back certainly to a level that is tempting corporate buyers back into the market," says Liam Booth, managing director of corporate finance at NCB Stockbrokers.

Yet as banks conserve liquidity, only the most compelling transactions will receive support. With that in mind, many market participants believe it will be difficult this year to surpass Scottish and Southern's €1.1 billion acquisition of Aitricity's European unit in the first week of January.

Building materials giant CRH, a prolific deal-maker that tends to disclose several transactions at once, has yet to come out of the traps this year. But the level of activity elsewhere suggests there's life in the market yet. It ain't quite a boom, but it ain't a bust either.

AIB spent €216 million a week ago buying 49.99 per cent of Bulgarian-American Credit Bank. Iona Technologies is assessing an approach from Software AG. Iona co-founder Annraí O'Toole sold his software firm Cape Clear to US company Workday earlier this month. Last Tuesday, privately held Antrim energineering group Rotary was sold to Australian group Hastie in a deal estimated to be worth more than £100 million.

Such developments suggest the initiative lies with strongly capitalised corporate buyers, often the also-rans when private equity funds drove valuations to peak levels. They also imply strong interest in expanding or profitable sectors such as energy and information technology. Financiers also cite infrastructure, healthcare, media and business services as being of interest.

"A lot of trade buyers would have remained in the wings when the debt markets were extremely strong and private equity was more prevalent than trade," says Dan Ennis, head of corporate finance at Merrion Capital. "The level of leverage has gone out of the market now. That has made trade players relatively more competive when it comes to purchasing assets. You would expect to see more activity from the trade side than in previous years because a lot of them would have been outbid in the recent past."

Without naming any particular companies, another financier says the sharp deterioration in share values on the Dublin market and the small-cap Alternative Investment Market (Aim) in London could open up deal possibilties.

"Small-cap publicly quoted companies on both Aim and the Iseq may be subject to takeover approaches or public-to-private plays, given dramatic reduction in market capitalisations over the past six months, despite underlying fundamental operating performance remaining strong in many cases," says John Sheridan, a director at Key Capital.

"In turbulent public markets, where companies' share values have in some cases halved over the past year, largely due to the credit crunch and macroeconomic factors, opportunities exist to partner with long-term private equity players who are less concerned with meeting quarterly reporting timelines."

While other M&A observers suggest the persistent weakness in the share price of listed companies such as Grafton, Kingspan and Horizon Technology might prompt some buyout interest if it persists, bids have yet to materialise. It is a given, however, that the evaporation of liquidity on the international money markets has a crucial bearing on the pricing of any deals that take place.

With business conditions more challenging now than for many years, financiers say company valuations have come back markedly from their boom-time peaks.

Part of that is attributable to bearish sentiment in the Irish market at large and its exposure to the unforgiving vicissitudes of the US economy and other global factors.

It also reflects pressure on earnings at businesses with exposure to the downturn in the Irish economy, particularly sectors linked to the declining property market, even though some market participants say that downturn has been overplayed.

MORE IMPORTANTLY still, lower valuations flow from much tougher conditions in the lending market. No matter what the strategic rationale for a takeover, the buyer has to be able to fund the transaction. This means increasing the equity component of a deal - or taking increased exposure to expensive mezzanine finance in a scenario where subordinated debt is already pricey.

"Liquidity is significantly constrained in the marketplace, which means there's less senior debt to support transactions. Whatever senior debt supports transactions is going to be at a considerably higher price," says Mark Duffy, chief of Bank of Scotland (Ireland).

In simple terms, the higher cost of borrowing means buyers will have less money to put on the table when bidding for assets.

"Over the last couple of years it's clearly been a very buoyant market. Last year, there were historic highs. But there's unquestionably been a pull-back with the liquidity crunch," Duffy says. "There are still lots of deals going around. There are trade deals and bank finance deals. That offers an opportunity for banks in a less crowded market place."

But will company owners do the deed in such a market? Whatever they decide, markets operate on the principle that every asset is for sale at the right price.

In the current market, much depends on the management of expectations. If many company owners took the benefit of high single-digit earnings multiples and beyond during the boom times, it is difficult now to justify such multiples for private illiquid companies when major quoted players such as CRH trade on mid-single digit multiples.

"What we're looking at at the moment is a repricing. The pricing of public companies clearly has come back. You have strategic buyers who are still interested in deals, but the multiple they can pay is limited by their price in public market," says Enda Gunnell, managing director of Mazars' corporate finance unit CFM Capital. "On the other side, the vendors are having to readjust their expectations of price downwards. Vendors will always be slower to do that. They're still going to try and get as much as they can."

Liam Booth of NCB notes a level of caution in the market, even though there is plenty of activity. "People will take more time on the way in in terms of due diligence. The consequence of that is that deal timeframes are stretching out a bit," he says.

While acknowledging corporate interest in the market, he says private equity should not be written off as a force. "In the private equity world, the sub-€300 million range is still active. That's still quite sizeable in the Irish context. The reason for that is that they're able to get debt funding for that scale of deals from local banks here and from the Irish subsidiaries of the European banks."

The coming months will tell all.

" There's life in the market yet: it ain't quite a boom, but it ain't a bust either