IRISH UPDATE – Trends and Prospects in Irish M&A Activity
- M&A activity in Ireland has been affected by global and national economic difficulties experienced over the past three years, but Ireland’s M&A activity has recovered from the historic lows experienced in 2009. This recovery looks set to gather pace in 2012.
- Much of Ireland’s M&A activity during 2011 was driven by the restructuring of the financial services sector by the State. Additionally, there was significant inward investment by foreign investors in Ireland, in particular in Ireland’s IT and pharmaceutical sectors.
- As in 2011, State initiatives are likely to drive much of the M&A activity throughout 2012. In particular, it is expected that the State will commence the heavily anticipated sale of State-owned assets. Additionally, it is expected that the National Asset Management Agency (“NAMA”), which has acquired the ‘bad debts’ of five of Ireland’s domestic banks, will accelerate its asset sales during 2012.
M&A activity in Ireland has been affected by the global and national economic difficulties experienced over the past three years. This was most strongly felt in Ireland during 2009, when there was an acute dip in M&A activity. Since then, Ireland has recovered very well. The significant rebound in M&A activity during 2010 was maintained (and improved) in 2011 and, overall, prospects for 2012 look promising.
2011 M&A Activity in Ireland
There were almost 190 M&A transactions in Ireland during 2011. Of these, the 80 largest transactions had an aggregate value of about €14.3 billion. The most active sectors throughout this period were Financial Services, IT/Telecoms, Health/Pharmaceutical and Food/Food services.
Financial Services: Throughout 2011 the financial services sector outperformed all other sectors in Irish M&A, with about 73% of aggregate value during the year being credited to this sector.
On 31 March 2011, the Minister for Finance of Ireland (the “Minister”) announced the State’s plans to restructure and recapitalise the Irish financial sector. By 31 July 2011, the following transactions had completed: (i) the acquisition by Allied Irish Bank, p.l.c. (“AIB”) of EBS Building Society following its demutualisation, (ii) the acquisition of 99.5% of Irish Life & Permanent plc (“ILP”) by the Minister for €2.3 billion by way of subscription for shares, (iii) the subscription by the State for shares in AIB for €5 billion bringing the State’s ordinary shareholding up to 99.8% of AIB and (iv) the recapitalisation of Bank of Ireland (“BOI”) by way of a State underwritten rights offering (the “BOI Recapitalisation”).
Immediately following completion of the BOI Recapitalisation, a group of North American investors led by Fairfax Financial Holdings purchased (in aggregate) a stake of just under 35% in BOI from the Irish State valued at €1.1 billion. Other investors in this group included WL Ross & Co, the Capital Group, Fidelity Investments and Kennedy Wilson. This transaction was hugely significant for Ireland, and was hailed as a massive vote of confidence in BOI, one of Ireland’s pillar banks, and also in Ireland’s long-term prospects.
M&A activity throughout 2011 in the financial services sector also reflects the significant de-leveraging by Irish banks of their ‘non-core’ assets. Activity in this area has been significant, and is likely to remain a staple of Irish M&A for some time to come.
Not surprisingly, a number of deals in Ireland in 2011 were driven by financial restructurings, most notably including the acquisition of Quinn Insurance by the Liberty Mutual Group and Anglo Irish Bank.
IT/Telecoms: In recent years, Ireland has become a hub of IT activity with many significant IT companies (like Google, Facebook, Yahoo!, LinkedIn and Zynga) establishing their headquarters in Dublin. As with other years, Ireland’s IT/Telecoms sector saw a great deal of M&A activity, most deals demonstrating the continuing desire of foreign investors to invest in Irish IT companies. Notable transactions in this areas include BAE Systems’ acquisition of the Norkom Group for €180 million and Telecity Group plc’s acquisition of Data Electronic Services for €100 million.
Health/Pharmaceutical: Ireland also has a very strong Health/Pharmaceuticals sector, and is home to 15 of the world’s top 25 medical devices firms. The trend in the pharmaceutical industry was, again, investment by US corporates in Irish companies. The largest deal in this sector was the acquisition by Alkermes Inc of Elan Drug Technologies for €669 million. This deal structure was innovative, as it involved Alkermes’ migration to Ireland (forming Alkermes plc) by way of merger, whilst maintaining its New York listing. Over the past three years many companies have chosen to migrate their top holding companies to Ireland (e.g. Seagate, Warner Chilcott, Covidien and Accenture) whilst maintaining their listings in the United States. However, this was the first time such a company implemented its migration to Ireland through a merger.
Food Services: Significant transactions in this sector included Greencore plc’s acquisition of Uniq plc for a reported €128.5 million, which was a strategic investment designed to strengthen Greencore’s market position and Glanbia’s acquisition of US company Bio-Engineered Supplements and Nutrition Inc for a reported €107 million, a transaction that was in keeping with Glanbia’s growth strategy. The main theme across the food services sector, however, was consolidation, with the most notable transaction of this type in this sector being Kerry Group’s acquisition of Cargill Flavour Systems for €171.8 million. Another innovative transaction in this sector, also designed to achieve consolidation, was the proposed acquisition by Greencore of Northern Foods by way of merger of equals. Although this transaction did not ultimately complete (due to a rival bid), it did mark the first use of the European cross-border merger regime in a transaction involving public limited companies listed on regulated markets in Ireland and the United Kingdom – and it demonstrated that this merger regime can be used beyond the realm of intra-group reorganisations.
Despite turmoil within European and global markets, the continuing ability of Ireland to attract foreign investment remains clear, in particular in the IT/Telecoms and Health/Pharmaceutical sectors. Strategic investments (both domestic and overseas) by Irish companies also continued, in particular for Irish listed companies who have, or are able to access, a variety of financing sources – including, as one example, CRH plc which spent €600 million in development during 2011.
M&A Outlook for 2012
The primary threat faced by M&A activity in Ireland is uncertainty within the euro-zone, in particular in relation to the future of the euro.
Indeed, late in 2011 the proposed sale of Irish Life (the insurance business of ILP) to Canada Life at a price in excess of €1 billion failed at a late stage and the collapse of the deal was widely attributed in the press to the buyer’s concerns about the euro-zone crisis. The Irish Government attributed the failed deal to the challenging European market environment, stating that it was not supportive to achieving a valuation that recognises the strength of the Irish Life business.
Notwithstanding, market-players remain optimistic that there will be a buoyant M&A market in Ireland throughout 2012. Indeed, there are already indications of strong activity in the M&A market in Ireland in the short to medium term.
It is expected that State initiatives are likely to continue to be key contributing factors to M&A activity in Ireland over the next twelve months.
One area of activity is expected to the sale of certain assets owned, or partially owned, by the State. In a report commissioned by the State (the McCarthy Report), a number of significant and valuable assets were identified for potential sale. Some of the assets identified for sale include the businesses of Ireland’s national electricity provider (ESB) and gas provider (Bord Gáis) and the State’s 25% stake in the national airline (Aer Lingus). The timing of any such disposals continues to remain unclear as the State insists that there will be no ‘fire-sales’, but M&A activity remains anticipated as it has been widely reported that both the EU and IMF are putting pressure on the Irish State to dispose of these valuable assets.
Another area of expected activity arises in relation to NAMA. NAMA was established in 2009 to purchase the ‘bad debts’ of Irish banks, mainly loans related to property and property development. NAMA also acquired the security for these loans. Since its establishment, NAMA has acquired loans with a nominal value of €72.3 billion from five Irish financial institutions participating in the initiative. NAMA’s objective is to obtain the best achievable financial return on these loans for the State on this portfolio over an expected lifetime of up to ten years. The Board of NAMA has set a number of debt reduction targets over its expected life, including a target of 25% by 2013. Additionally, by the end of 2011, NAMA had approved the sales of assets totalling €6.2 billion and had appointed a panel of advisers in relation to proposed sales. Accordingly, it is generally expected that, during 2012, disposals by NAMA of loans and assets will accelerate.
Coupled with these initiatives is the ongoing restructuring of the financial services sector in Ireland. It is likely that there will be further M&A transactions in the financial services area, in particular to achieve the deleveraging of the Irish banks.
According to Ernst & Young’s 2011 annual globalisation index published on 31 January 2012, Ireland is the world’s second most globalised nation in terms of GDP, and Ireland is forecast to remain in this position until at least 2015. The report also states that Ireland is the most globalised nation in the western world. This report confirms that Ireland is, and despite recent economic difficulties, remains a leader in international trade.
The strength of the investment opportunities available in Ireland continues to be very attractive to a broad range of investors and we expect growing levels of M&A activity during 2012.